BeyondVC » Entrepreneurshiphttp://www.beyondvc.com
Ed Sim's blog on venture capital, technology, the markets, and life in a connected world...Mon, 21 Mar 2016 13:36:34 +0000en-UShourly1http://wordpress.org/?v=4.3.6First enterprise customers – revenue or user engagement?http://www.beyondvc.com/2015/10/enterprise-customers-engagement.html
http://www.beyondvc.com/2015/10/enterprise-customers-engagement.html#commentsFri, 02 Oct 2015 13:45:42 +0000http://www.beyondvc.com/?p=678Since we are seed investors in enterprise technology, I am often asked this question. The answer on the surface seems quite obvious — generate as much revenue as you can to prove that customers find value and are willing to pay. My answer is the less obvious one — focus first on user engagement and the revenue and bookings will follow.

Wait, isn’t user engagement more of a consumer metric? It is, but it is equally as important to focus on this metric in the enterprise. No matter what business you are in, you need to ensure that your ultimate customer (the end user) is happy and absolutely loves using your product. I have seen countless situations where a startup extracts initial dollars top-down from an enterprise but ultimately cannot get traction because the end users don’t love the product. Without love of product there is no user engagement, and without user engagement, there is no long-term customer.

This is especially important in the age of SaaS as switching costs are quite low for substitute solutions. This is also the reason why next to VP of Sales, I would argue a VP of Customer Happiness/Success is a crucial hire. One is for generating new revenue and the other is for expanding existing customers and reducing churn. It is also why a number of companies have been created to help understand and monitor user engagement in the enterprise to proactively determine issues before they happen (totango, gainsight, and preact — full disclosure, my fund is an investor)

What is user engagement in the enterprise? When understanding initial customer traction, we like to understand how a product/solution can/will become a daily habit for the user. It is pretty clear that the more an end user interacts with the product the more important it becomes and ultimately the more value it provides. Another important metric to optimize for would be expansion of users within an existing account. In other words, how do you sell into one user and create viral loops (sharing dashboards, etc) and expand the active user base for the product. Once again, this sounds like a consumer metric but quite an important one —the more people that use it the more it becomes part of the ingrained workflow creating more value.

The challenge sometimes is that many enterprise tech companies are designed to work in the background, invisibly to automate tasks or aggregate data to reduce noise. If your tech is seamlessly analyzing data in the background, you need to find ways to show the user how awesome your product is by either sending alerts or creating some other eye candy to remind the user that your product is working and important. I have seen a few of our portfolio companies implement some simple changes regarding this and see their usage increase significantly.

So to recap, revenue matters but the path starts with optimizing for the end user in the enterprise and focusing on engagement. Once you create happy end users who love your product, the revenue will follow.

I was on the phone yesterday with the CEO of one of our portfolio companies, and we were talking about goals for the next few months and in particular, what the company needed to get a Series A done.

Her answer was quite simply “make the product delightful.” She continued: “I want to iterate to continue to make the product faster, better, and easier to use. I want to get the user to the “a ha” moment even faster.”

And with that I knew that she got it. The company paid user base is already growing rapidly but rather than focus on a couple of features that can boost MRR in the near term, she would rather focus on the longer term.

This reminds me of a quote from Yossi Vardi, founding investor in ICQ (creators of IM and sold to AOL).

“Revenues kill the dream.”

It may sound counter-intuitive but what Yossi is really saying is don’t sacrifice long term opportunity for short term revenue…

When Willie Sutton, the prolific bank robber, was asked why he robbed banks, he answered, “because that’s where the money is.” When asked by investors in early 2010, why we were starting a seed fund focused on enterprise and leveraging NYC, I answered with Willie’s quip but also said, “because that’s where the customer-driven talent is.” One of the key criteria for successful enterprise investing besides team, product, and huge markets is ensuring that you invest in a “must-have” and not a “nice-to-have” solution. When companies are born out of real pain, more often than not this criteria is wholly satisfied!

I bring a unique perspective to this conversation having been a VC based out of NYC for the last 19 years (wow — am I dating myself!). While I have had my fair share of failures, I have also been a first round investor in many enterprise successes both in and outside of NYC, including leading or seeding the first round in LivePerson ( NYC, current market cap of $650mm), Greenplum (sold to EMC, now Pivotal), GoToMeeting (sold to Citrix, now Citrix Online doing over $600mm+ revenue), Divide (NYC, sold to Google), blaze.io (sold to Akamai), GoInstant (sold to Salesforce.com) and a few others.

Necessity is the mother of invention

As I think about common characteristics of great enterprise startups that I have had the pleasure to work with in NYC, I think about entrepreneurs building companies based on great pain, a deep understanding of the customer problem because they are customers themselves, and from that, using their computer science backgrounds to engineer a better and more scalable solution. Many of these great founders are simply hidden in larger companies, developing software for non-tech firms and functioning where tech is more of a support role versus front and center in terms of driving revenue growth. This is much different from entrepreneurs leaving established software vendors wanting to create a bigger, better, and cheaper mousetrap with a “great technology in search of a problem to solve.” While starting with a customer pain is great, the big question for many of these startups is whether or not this pain is a one-off or a market problem that is massive enough to attack.

Success Breeds Success

Divide

When we first met Andrew Toy and Alex Trewby in mid-2010 they were VPs Wireless at Morgan Stanley and experiencing a huge pain point — employees were bringing in their iphones and android devices for personal use while still using their blackberrys for corporate purposes. Like any great entrepreneur, they asked the question, how do I solve this problem with software and allow companies to have the peace of mind and security policies needed for them while also allowing employees to use their existing devices. The challenge was to create a separate sandbox that could be easily used and understood. Rather than forking off android, Andrew and Alex built an App, something consumers could easily understand and yet make it easy for huge enterprises to deploy. The big bet in 2010 was that we would move to a BYOD world and that Android would become a dominant mobile platform (at that time, it was a big bet!) Hence Divide was born and 4 years later sold to Google and now branded as Android for Work with a stated goal of being on a billion devices. Pretty cool for two ex-technology execs at a financial services firm!

Security Scorecard

We first met Alex Yampolskiy and Sam Kassoumeh in-mid 2013. They were both formerly Chief Security Officers at Gilt Groupe and were experiencing major pain in their day to day jobs. They were in charge of auditing the security of every vendor that touched the Gilt platform and all of it was done manually through intensive Q&A and when in doubt, via an expensive security audit from a consulting firm. As Alex and Sam spent many cycles on this method, they asked themselves if they could continuously scan the security of their partners in a non-intrusive way. It was already clear that software was moving to the cloud but less certain was the belief that a company is only as secure as its least secure partner and continuous monitoring would be imperative. From this, security scorecard was born. SecurityScorecard provides precise global threat intelligence and risk awareness continuously and non-intrusively so businesses and their partners can collaboratively predict and remediate data security issues. Fast forward 15 months from the initial seed round, and they have landed several large customers and closed a $12.5mm Series A with Sequoia Capital, founding investors in some phenomenal, multi-billion dollar security companies — netscreen, palo alto networks, and fireeye.

I could go on and on about many other great enterprise companies in NYC, but you get the point — find a massive pain that you are experiencing and living with first hand and create a software solution around this. It is this unique understanding of the customer that we will see time and time again as new enterprise-related startups in NYC are launched. It is also this deep domain expertise and understanding of the customer that will allow many enterprise startups in NYC to flourish, especially as we live in a cloud-based world where switching costs are not as high as they once were.

Bottom Line

The idea of NYC enterprise startups succeeding should no longer be a laughing matter. We have great entrepreneurs, companies, talent, and investors ready to capitalize on Willie Sutton’s vision — NYC is where the money is (see Jonathan Lehr’s great overview on NYC Enterprise Tech). We at boldstart ventures feel quite fortunate to be invested in a number of enterprise related startups in NYC like security scorecard, divide, truly wireless, handshake, yhat, and bowery.io and are excited about the future of enterprise tech in NYC. We have seen more success stories in the last 3 to 4 years versus the 10 years before that, and we expect this rapid innovation to continue. While many of these companies are engineers coming from large Fortune 1000 type companies here in NYC, we are also increasingly seeing founders leaving the more established tech companies like Google, OnDeck Capital, and Gilt to pursue their dreams.

As I write this I am wondering who the next entrepreneur will be that is hidden in the bowels of a more established company, feeling massive pain everyday, and ready to launch the next unicorn like MongoDb. Is that you?

]]>http://www.beyondvc.com/2015/03/take-enterprise-tech.html/feed0boldstart ventures in 2014 – our ethoshttp://www.beyondvc.com/2014/02/boldstart-ventures-2014-ethos.html
http://www.beyondvc.com/2014/02/boldstart-ventures-2014-ethos.html#commentsWed, 12 Feb 2014 15:13:35 +0000http://www.beyondvc.com/?p=644As we look into 2014, we thought it was important to reflect on our activities in 2013 and refocus and refine our thinking and messaging as a firm. We are thematic in our approach and primarily known as seed investors with a focus on enterprise and companies that can scale quickly. To date our messaging has been clear, but we also could not ignore the fact that companies like Plain Vanilla Games took off quickly and became known as the fastest growing mobile game in history. The challenge for us is how to explain this in a focused, simple manner.

Here is our attempt and then I will break down how it all ties together:

boldstart's messaging
We have over 20 years of experience backing bold founders with big visions. Our founding team has led first rounds in market leading enterprises such as LivePerson (LPSN), GoToMeeting (sold to Citrix), Greenplum (sold to EMC), and 24/7 Media (TFSM). BOLDstart helps founders at the seed stage accelerate their growth from idea/ alpha phase to product market fit and successful Series A round. With a focus on seed investing in the mobile, agile, and smart enterprise and business models that harness the power of network effects, our entrepreneurs have successfully been able to raise over $200 million of financing following our initial seed investment. Founded in 2010, we have backed 27 awesome teams including Indiegogo, divide.com (sold to google), goinstant (sold to salesforce), blaze.io (sold to Akamai), thinknear (sold to telenav), Plain Vanilla Games (quizup), rapportive (sold to LinkedIn), and klipfolio.

ok, so let's break down the key elements of our message:

"We have over 20 years of experience backing bold founders with big visions.”
That is pretty self explanatory. However, to add to this, we love entrepreneurs who have big visions but of course, start with an incredibly focused product. This means we invest in product-driven engineering teams where all of the development is done in house and where rapid iteration is a key to success.

"helps founders at the seed stage accelerate their growth from idea/ alpha phase to product market fit and successful Series A round”
While this sounds simple, there is a ton of work that goes into helping our portfolio companies get to a successful Series A. This includes thinking through what milestones the startups will need to hit to make them attractive for an A round and ensuring there is real plan with enough cash (typically 18 mos) and runway to get there. Since most of our companies have a product that is in alpha stage (super early, buggy), we like to help our entrepreneurs get more market data and customer feedback through our relationships to help them further refine their product.

We also help our teams find key engineers, and sales and marketing folks who can help build and refine the gotomarket strategy for the entrepreneur. Finally, we try to prewire the Series A investment by getting our portfolio companies to meet with the right partners at the right firms early on before they even need money. Getting feedback from smart Series A funds helps the entrepreneur further hone their message.

"focus on the mobile, agile, and smart enterprise"
The big trend in technology today is the growth of mobile. The other force we always hear about is the consumerization of technology meaning that much of the innovation in design, applications, and user interface is driven by consumers first (think Facebook, twitter) and then brought into the enterprise or business after the fact. Yammer would be a great example of a Facebook like feed being brought into the enterprise and then being sold to Microsoft for $1.2 billion. Here at BOLDstart, we believe we are still at the very beginnings of this consumerization trend in the enterprise and hence our focus on the “mobile and agile enterprise.” Many of our portfolio companies in BOLDstart II reflect this theme such as Truly Wireless and handshake .

The other big theme is one of big data. As you know, we believe big data is passé and the real trend is smart data or what you do with the big data that matters. Storing and scaling tons of data cheaply and efficiently is already done. Smart enterprises are analyzing all of this data to make better decisions, increase revenue, and improve operating performance. Making sense of that data with algorithms and other software is the next wave and is reflected in investments like Coherent Path, klipfolio, security scorecard, and preact .

“companies that harness the power of network effects”
we are really investing in companies that can scale rapidly with zero to limited to market costs. Another way we think about this is that we fund products or companies that derive most of its growth by users recruiting other users. In industry terms, this means we looks for companies that have a high viral coefficient. Since we can’t predict the future, our investments in these types of companies are driven by small data sets that we can extrapolate to determine the potential opportunity and usage. For example, when we funded Plain Vanilla Games (Quizup), the team had launched a small test app in Europe called Eurovision Quizup where they were able to sign up 10,000 users in a week and one month later still had 30% of the users come back up to twice a day for 30 minutes a day. Given that other analogs like Words With Friends (scrabble) and Draw Something (dictionary) were quite successful and that no one had done Trivial Pursuit in the right manner, we decided to back the company in the seed round. As they say, the rest is history. We have taken this same approach with other networked investments like memoir.

finally, this theme is also applicable for b2b...
There is also a b2b theme as companies like ooomf and emissary.io are leveraging network effects, viral marketing, and growth hacking to ramp up their user base in the enterprise side. In addition, many enterprise software companies are exposing their functionality/service via APIs so other developers can easily build upon their platforms. APIs are the new business development models for these companies and once again represent many of the elements of consumer platforms. Companies like yhat, zillabyte, and goinstant fit this model.

In the end, we believe that we are better investors in the agile and mobile enterprise because of our front row seat investing in innovative, networked consumer companies. Companies like Plain Vanilla Games and Memoir help inform our thinking on what may/may not work from an enterprise perspective. The long term trend in the enterprise that we have been investing in for years is bottom up marketing. Instead of selling at the C-level, companies are better off getting one user in a department to use a product and then building in viral hooks and loops to help bring other employees on board. This is yet another example of the consumerization of tech. One of our most recent investments which is in stealth mode (will be announced shortly) is a great example of this - 3 users began to use the enterprise product and within 2 weeks, 42 of 45 employees were using the service and were interacting with it at least twice a week over a period of a couple of months. Now there is a backlog of over 200 companies waiting to use the system (we will give more detail in the next newsletter).

We hope this gives you a better idea of how we are thinking about opportunities and building our portfolio in 2014 and more importantly how to approach and what types of companies and teams in which we like to invest.

]]>http://www.beyondvc.com/2014/02/boldstart-ventures-2014-ethos.html/feed0Branding first starts with your teamhttp://www.beyondvc.com/2013/05/branding-first-starts-with-your-team.html
http://www.beyondvc.com/2013/05/branding-first-starts-with-your-team.html#commentsFri, 17 May 2013 14:07:49 +0000http://www.beyondvc.com/?p=594External branding starts with developing a consistent, internal message first. When you think of branding and positioning, remember that your first line of offense and the most important representation of your company comes from your employees. Make sure you have a succinct, crisp and clear 2-3 sentence pitch on what you do and that everyone from the CEO down to the engineer or QA can repeat the same mantra. Whether your employees are doing sales pitch or at a conference or cocktail party, they should all be starting with the same message. The more it is said the easier the message spreads. We live in a sound-byte generation with information overload so if you can cut through the clutter with a powerful and succinct message, you will not be forgotten.

tph1

It reminds me of the old kids game "telephone" where one player starts with a message and passes it down the line and in the end the last player repeats what they heard. Many times the message is completely different from the initial version. Obviously if you think of messaging in terms of the game "telephone" you will quickly recognize that the crisper and simpler it is, the harder it will be to get lost in translation. You want the next degree of relationships to be able to explain just as easily as your employees - this is how great buzz builds.

At Cisco, it was "we network networks" or at Tableau Software which went public today "we help people see and understand data" Obviously what goes into sentence 2 can provide a little more detail on how or why you are special (see my blog post from 2007 on why vision statements matter and how to craft one). In Tableau's case, it is "we help anyone quickly analyze, visualize and share information." And sentence 3 is the build and ah-hah moment - "More than 10,000 organizations get rapid results with Tableau in the office and on-the-go." Yes, that is strong messaging to the outside world and in the written word but it can also be simplified for strong messaging from employees in the spoken word.

So remember when it comes to messaging and positioning, keep it simple, easily remembered and to the point. What is your message and does everyone on your team know it? When your startup is out in the market meeting with customers and VCs, will everyone you meet be able to say the same message - "yeah, i met this cool company today and they do "x". If so, you off to a great start!

]]>http://www.beyondvc.com/2013/05/branding-first-starts-with-your-team.html/feed0Camping out and closing dealshttp://www.beyondvc.com/2013/01/camping-out-and-closing-deals.html
http://www.beyondvc.com/2013/01/camping-out-and-closing-deals.html#commentsTue, 15 Jan 2013 14:12:48 +0000http://www.beyondvc.com/?p=576I am sure you can see a common thread in many of my recent posts – Sales, Sales, Sales! I don’t care how great your product is because without an ability to articulate the value proposition succinctly, tell the world about it in a capital efficient manner, and sell the damn thing, you are SOL (yes, shit out of luck!).

Pitch11x14 original

So what does camping out have to do with selling? Let me explain. In sales I am sure you have heard about all of the various models to prospect, push leads through a funnel, and get to closing. One underestimated method is the “camp out sale.” What is it and how do you do it? Well quite simply, when things begin to stall you basically pick up the phone or send an email and tell the prospect you will be in town the next day or week and would love to come by. You then “camp out” and don’t leave until you get an answer, presumably yes. I have to warn you that you need to employ this method selectively and have the right criteria (relationship with sales prospect, size of deal, timing, etc) in place because if done the wrong way you can waste a ton of money and time trying to close deals. Email, phone calls, and video chats are great, but sometimes you just need to be there to move a process forward. I have seen this done right many a time and can’t tell you how effective just showing up can be.

To that end, I was on the phone with an entrepreneur yesterday who was trying to get their round closed. The investor wanted to set up a call to meet the other co-founder before making a decision. Like any great entrepreneur would do, he simply said I will be there tomorrow and proceeded to book a flight for first thing the next morning. I will let you know how this story ends but I can assume that an entrepreneur who shows that kind of hustle and willingness to walk through walls to make their company a success will surely leave a great impression regardless!

]]>http://www.beyondvc.com/2013/01/camping-out-and-closing-deals.html/feed1Cutco Knives and startupshttp://www.beyondvc.com/2012/09/cutco_knives_and_startups.html
http://www.beyondvc.com/2012/09/cutco_knives_and_startups.html#commentsFri, 28 Sep 2012 13:18:19 +0000http://www.beyondvc.com/?p=552When I worked for Cutco Knives one summer in college selling the world’s finest cutlery, my dream was to sell the Homemaker +8 at every meeting. It was the Rolls Royce of knife sets and in every sales call I had, I always tried to flog the deluxe set. Of course, more often than not, I left with selling a spatula spreader or much smaller set. Many a memory was brought back yesterday as my wife and I went through a sales pitch for Cutco knives from an enterprising college student. His pitch was great…and entertaining…and the same from 20+ years ago – cut the penny with the scissors, cut some rope, lay out the catalog, and even the close. Would you like the Homemaker +8 or the Homemaker +4?

How about the Essentials +5 or the Essentials. As I sat in on the sales call, what I remember most about selling knives was that it was a tough and lonely job and my friends teased me the whole summer about being little more than a “door-to-door” salesman flogging kitchen utensils. Looking back on that experience, I recognize that I learned so many valuable skills about selling and more importantly about myself in terms of constantly being rejected but still having the optimism and fight to move on to the next opportunity. I am sure by now you are thinking, what does selling knives have to do with startups?I strongly believe that every entrepreneur should take a sales job at one point in their life, even for a summer. Whether you are a tech guy or product guy or executive, you have to remember that you are always selling – not just to the external world like customers and VCs and partners but also internally as well, drumming up support, getting the team to buy into your ideas, and much more. I believe there is sometimes a stigma for being a sales person but in reality no business can ever succeed without someone selling your product or service.

Selling Cutco Knives was great because I went through sales training which at the time seemed incredibly cheesy, became enamored with trying to win salesperson of the week and month, and learned how to use referral based lead generation to create sales appointments. I learned about creating a great script to use on the initial sales call (great understanding for understanding the life of an inside sales rep), how to use a presumptive close (can we meet this Wednesday at 3 or 5), how to properly make a sales call, how to read my potential customer, and ultimately how to manage my own personal sales pipeline and funnel. From that experience I went on to start my own window washing business and develop a deep appreciation for sales reps and how hard their job really is. And I find myself selling every single day in my life as a venture capitalist – selling to potential investors, selling my value add to startups, selling to portfolio company CEOs on why they might try another way to accomplish a certain goal, and selling my own partner on why we should or shouldn’t do a certain deal. If you are wondering what happened at the end of our sales call, my wife and I ended up buying the lovely Homemaker +8 and gave our rep a boatload of referrals.

]]>http://www.beyondvc.com/2012/09/cutco_knives_and_startups.html/feed14Startups and Intellectual Property (IP)http://www.beyondvc.com/2012/05/startups-and-intellectual-property-ip.html
http://www.beyondvc.com/2012/05/startups-and-intellectual-property-ip.html#commentsWed, 16 May 2012 15:02:04 +0000http://www.beyondvc.com/?p=536Lately questions about Intellectual Property or IP have been cropping up left and right. Eliot Durbin (my partner at BOLDstart Ventures) and I had a long discussion this morning in preparation for his panel today about IP and patents. Last week, we met with a company and when we asked about their core IP, they launched into a 5 minute discussion about the various patents they filed. Do startups really think patents are going to make or break their business? Yes, having core tech or IP matters but patents are a different question altogether. Your best protection is continuing to focus on building your business, your product, and getting market share. So what is my and BOLDstart’s stance on IP and startups.

1. We look at the team and the product and market first

2. We like to think that all of our investments have IP.

3. IP does not mean patent. IP in our mind is your “secret sauce” for doing what you do better, cheaper, and faster than anyone else. Its great if you filed for a patent but that is a long process taking 18-24 months and by the time you get a patent the market opportunity may have already passed you. Focus on building your product and market share, not on patents. That is your best protection and competitive advantage. Waiting for the patent office to tell you that you have a patent is a nice to have, not a must have.

4. Even if you have a patent, it takes tons of time and shitloads of dollars to defend. Trust me, I’ve been there, and it seems to me that the only person making money in these cases are lawyers. In addition when defending patents you will inevitably fight with the big boys with billion dollar balance sheets so that is not a place to spend your time and money.

5. Don’t start a company where there is already a patent battle brewing like email on phones. We are looking for innovations, the next big thing, not yesterday’s way of doing it.

Hopefully that gives you a good perspective on our view on IP, patents, and startups.

]]>http://www.beyondvc.com/2012/05/startups-and-intellectual-property-ip.html/feed8What entrepreneurs can learn from Jeff Spicolihttp://www.beyondvc.com/2012/01/what-entrepreneurs-can-learn-from-jeff-spicoli.html
http://www.beyondvc.com/2012/01/what-entrepreneurs-can-learn-from-jeff-spicoli.html#commentsWed, 25 Jan 2012 17:28:01 +0000http://www.beyondvc.com/?p=524I know I may be dating myself here, but over the past few weeks I couldn't help but think about the movie Fast Times at Ridgemont High and one of the standout characters, Jeff Spicoli. When asked by Mr. Hand, his teacher, why he keeps coming late and wasting his time, Spicoli answers, "I don't know."

In several meetings with entrepreneurs during the past few weeks, they would have been better off answering like Spicoli rather than giving me some hollow bull shit answer. I want to make it very clear that I don't expect entrepreneurs to have all of the answers to my questions. In fact, many questions I have may not have an answer today so "I don't know" will be your best answer. My one caveat is that the "I don't know" is followed by a how might you figure out the answer or a when might you figure it out. This line of questioning is really just another way to test how you think and determine how our working relationship might be were I to invest. I would rather have the honest "I don't know but I'll figure it out" then a made-up answer that will never allow you or your investors to really understand what is driving your business.

]]>http://www.beyondvc.com/2012/01/what-entrepreneurs-can-learn-from-jeff-spicoli.html/feed3Startups getting caught in No Man’s Landhttp://www.beyondvc.com/2011/09/startups-getting-caught-in-no-mans-land.html
http://www.beyondvc.com/2011/09/startups-getting-caught-in-no-mans-land.html#commentsThu, 29 Sep 2011 14:29:28 +0000http://www.beyondvc.com/?p=489"No Man's Land" is traditionally known as the area between two trenches. This is a reference to World War I and the vicious trench warfare and hand-to-hand combat that characterized that war. In "No Man's Land" lay a wasteland of dead bodies and other debris and shrapnel. Increasingly I am seeing many startups who were ably seed funded get caught in "No Man's Land" between the seed round and a true Series A round led by a venture capitalist.

This is happening because there are way too many companies raising seed capital but not enough executing their way to a Series A. This can happen for many reasons including not raising enough capital in the seed round to begin with and of course not getting your product out the door. So what does an entrepreneur do when caught in this predicament? Many try to do an additional seed round or add-on to the prior round. While not a bad idea, this is rarely successful because many seed funded startups have way too many investors who are more apt to write off the investment then to bridge more seed money. Secondly many angel investors would rather invest in that shiny new car or first seed round then add more capital to a used car or startup that did not "get there" on its first seed financing. Smarter entrepreneurs are increasingly doing two things to make sure they don't caught in "No Man's Land." First, rather than getting 20 great names as seed investors, they are making sure to get at least 3/4 or more of the round invested by a couple institutional seed folks that may have deeper pockets and more ownership in the startup to really care about what happens in the future. Secondly, the smarter entrepreneurs are really thinking carefully about what milestones need to be hit to raise that first Series A round and work backwards to determine how much financing they need to get there. While not an exact science, it is imperative to think like this as you don't want to be one of the many seed-funded companies that will linger in "No Man's Land."

]]>http://www.beyondvc.com/2011/09/startups-getting-caught-in-no-mans-land.html/feed2The New York Startup Market Rocks and is REALhttp://www.beyondvc.com/2011/04/the-new-york-startup-market-rocks-and-is-real.html
http://www.beyondvc.com/2011/04/the-new-york-startup-market-rocks-and-is-real.html#commentsFri, 15 Apr 2011 12:02:43 +0000http://www.beyondvc.com/?p=484OK, I may be biased having been an early stage VC based out of New York since 1996, but I must say that the vibe, energy, and people at the Techstars NYC Demo Day event yesterday was simply awesome. Dave Tisch and team simply did a fantastic job guiding the startups, recruiting the mentors, and organizing the event. I was quite honored to have been a mentor and to have had a chance to interact with so many high quality teams. The audience was awesome as well bringing together many rock stars of the past with those of the future. In addition, over 750 investors came in from all over including London, California, Boston, and DC to network and participate.

Rather than go in-depth on each Techstar company like Alyson Shontell or Ryan Kim already have, I wanted to highlight some overarching thoughts on the NYC market having been an investor here for over 15 years. As mentioned above, what I loved most about yesterday was not only catching up with many new friends, but also many old ones who were an integral part of NYC 1.0. Besides talking about the interesting pivots that many of the Techstars companies took during their 3 month program, many of us simply could not resist talking about how the energy was similar to the mid-90s but why this felt different. In fact, I would liken the 90's Silicon Alley scene as one of discovery but also one where you could argue that the "Emperor had no clothes" meaning that there were lots of great entrepreneurs and startups but no real lasting value created. Look, New York had to start from scratch but 15 years later what makes this different is that we can see a much better result-the same energy combined with real operating and entrepreneurial chops, real succceses and failures, real IPOs and multi-hundred million dollar exits, and a focus on the entrepreneur and product, not on the spreadsheet. So why will this be different this time around:

1. Stronger Ecosystem-accelerators like Techstars, DreamIt, and NYCseedstart have real entrepreneurs and VCs with real experience advising these startups - the pivot and changes from many of these startups from DemoDay was quite impressive and evidence of a stronger ecosystem

2.Real technical experience-what everyone of these startups had in-common was a strong core team of technical founders, rather than business folks outsouring development. And with that, it was clear to see how much these startups could accomplish with so little capital and just sweat equity. These entrepreneurs understand the concept of lean startup and as opposed to entrepreneurs of the past who hailed from big media/ad agencies/big companies, this new generation of startups starts with the tech guys, the way it should be.

3. Financial support system-now you have Angels and VCs who get it. I remember the number 1 complaint in the mid-90s, New York VCs don't get it. They are risk-averse and spend too much time on spreadsheets analyzing the nth detail on a financial model instead of focusing on the talent and product/market. 15 years later, we have many Angels who are former entrepreneurs and many VCs who get it that are in NYC. Add VCs from Boston and CA and elsewhere and you have quite an experienced plethora of investors to work with.

The next inevitable question from this rah rah post will clearly be is this a bubble where yesterday further showed the frothiness of the market? I can't comment on the public markets but what I can tell you is how these Techstars companies raise capital and at what valuations and timeframe will surely provide us with some leading indicators. Hopefully they all get funded but I also hope that these entrepreneurs maintain their confident yet humble approach to building their business the right way and not get too caught up in chasing the highest valuation they can get. All in all, what a great day yesterday and I hope to see many more awesome startups build real businesses out of the New York area. Regardless of what happens, we now have a history of failures and successes which means that we all have more experience to help guide us as we continue to move forward to solidifying NYC as a go-to place for startup activity.

]]>http://www.beyondvc.com/2011/04/the-new-york-startup-market-rocks-and-is-real.html/feed4Reflecting on passed investmentshttp://www.beyondvc.com/2011/04/reflecting-on-passed-investments.html
http://www.beyondvc.com/2011/04/reflecting-on-passed-investments.html#commentsTue, 05 Apr 2011 15:46:22 +0000http://www.beyondvc.com/?p=471Every 3 months I dig through my "passed company" folder to look at what investment opportunities we passed on and why. Inevitably, there are a few companies that are near-misses, but we end up passing on for whatever reason. Did we pass because we didn't think the team was great or because we didn't believe that they could get a product launched? Did we pass because of lack of traction in the beta release or because of concerns on valuation? Looking at my "passed company" folder gives me an opportunity to test our reasons on passing and to see 3 months later if the entrepreneurs could actually execute or prove our concerns wrong.

While many times I find doing this reflection further confirms our reasons for passing, I also find myself from time-to-time sending up a follow up note to check in on these near-misses or doing a quick Google search to see how the company has progressed since our last communication. Inevitably, there will be a few that "got away" and seem to be doing quite well. No one is perfect and looking back every quarter gives me an opportunity to better hone my investing acumen and further refine my understanding on what separates a potential winner from a loser. Many times we are so busy that we can only look forward to the next new thing or next hot deal, but I encourage you to occasionally take a step back, look in the rear-view mirror, and learn from your past history. I promise you that this reflection will only make you a better investor in the long run.

]]>http://www.beyondvc.com/2011/04/reflecting-on-passed-investments.html/feed5Know When to Hold 'em, Know When to Fold 'emhttp://www.beyondvc.com/2011/02/know-when-to-hold-em-know-when-to-fold-em.html
http://www.beyondvc.com/2011/02/know-when-to-hold-em-know-when-to-fold-em.html#commentsMon, 14 Feb 2011 17:10:32 +0000http://www.beyondvc.com/?p=460I had a tough call with an entrepreneur this morning. His company raised a fair amount of seed financing but did not hit the milestones it needed to in order to raise a real round of venture capital. The product is nice but they took too long iterating and releasing a subsequent version while the market around it moved much quicker. In the process, the company ramped up too quickly before it knew exactly what the core value proposition was and to whom. Net net, the entrepreneur was left with a few choices: skinny the company down and try to get to breakeven, look to existing Angel investors for a bridge, shut the company down, or try to sell the business. I am not going to go through each one of the above decision trees in this post, but given the market dynamics today and the overflow of angel funding, I am sure that this is a conversation that many an angel and entrepreneur are having right now. Net net, way too many companies have received angel funding and many of these companies will not raise subsequent rounds of funding.

That is ok as that is how markets work. If you are in this position, all I can say is don't give up but also be honest with yourself and team. Assess your strengths and weaknesses, dive into the market and opportunity, and be as lean as possible to give you as much time to get to where you want to go. If you decide to fight through it and pivot and have the support of your existing investor base then great. Many companies have been successful that way. If you decide it is time to move on and capture whatever value you can for the assets then great as well. Just make sure that you have this conversation with your investors earlier rather than later to ensure you have enough time to execute on the new path. In the end, this process is not unlike what The Gambler from Kenny Rogers song had to go through at the table.

You got to know when to hold `em, know when to fold `em,
Know when to walk away and know when to run.
You never count your money when you`re sittin` at the table.
There`ll be time enough for countin` when the dealin`s done.

]]>http://www.beyondvc.com/2011/02/know-when-to-hold-em-know-when-to-fold-em.html/feed2Put your users first!http://www.beyondvc.com/2011/01/put-your-users-first.html
http://www.beyondvc.com/2011/01/put-your-users-first.html#commentsThu, 13 Jan 2011 13:21:11 +0000http://www.beyondvc.com/?p=456As a VC who invests in seed and first rounds, I love revenue just as much as the next guy. However, the focus on revenue should play second fiddle to a user/customer first experience. Over the years, how many times have we seen companies grow from next to nothing in user base and somehow forget why they got there in the first place? Yes, the answer is because they made an insanely great product or service that catered to their users. Over time they then figured out how to generate revenue without destroying the delicate balance of putting the user first but generating revenue for the business. In an article in the NY Times yesterday, there is a great quote from the MySpace founder, Chris DeWolfe:

“The paradox in business, especially at a public company, is, ‘When do you focus on growth, and when do you focus on money?’ ” said Mr. DeWolfe. “We focused on money and Facebook focused on growing the user base and user experience.”

This a question that we constantly struggled with at Answers.com years ago and now have found to have struck the right balance. I remember some of the management and board meetings where we would all intensely debate whether to add an extra advertisement or not on a certain page and how that would impact the user experience vs the revenue line. While this sounds like minutiae and too much detail, I would argue that if you don't have this debate internally that you may be tilted too far in one direction. In the end user experience won, the page views continued to grow, and consequently revenue improved significantly. Over my 15 years of investing, it is pretty clear to me that the users are in control, keep them happy, and they will come back for more!

]]>http://www.beyondvc.com/2011/01/put-your-users-first.html/feed3Standard investor update for startupshttp://www.beyondvc.com/2010/10/standard-investor-update-for-startups.html
http://www.beyondvc.com/2010/10/standard-investor-update-for-startups.html#commentsWed, 20 Oct 2010 09:41:42 +0000http://localhost/t2wp/2010/10/standard-investor-update-for-startups.htmlI remember when we hired a new CEO for one of our portfolio companies and my tip to him was to overcommunicate. We had a few large VCs on the board and a number of high-profile angels that could also help in various ways. His job was to keep everyone up-to-date but also to know how to get help when he needed it and from whom. Given today's excitement over seed investing it is not uncommon for many of today's entrepreneurs to have 5-15 investors in any given round. How you effectively communicate with your investors is an important priority that if done right will give you major value add while also not taking too much of your time.

In order to help our new CEO, I reached out to all of the other investors, and we all agreed that if we all spoke to him a few days a week about the same information that he would not have time to run his business. In addition, this would be redundant for the CEO since most investors were asking for the same basic information. In the spirit of streamlining information flow, we worked with the CEO to put together a weekly email to provide us with the key metrics the company tracked along with departmental updates on key high priority projects. We weren't asking the company to create something they shouldn't already have (key metrics, departmental priorities, cash balance) but rather we just wanted the data shared on a timely basis. Over time, we all found that when we did speak with the management team that we did not have to spend a half hour gathering information but rather we could get right to the point and actually discuss the whys or hows on certain sales numbers, metrics, or prospects. In the end, we were all much happier and more productive since we had the same baseline of information and could focus our energy on productive and deeper conversation on the business stategy rather than gathering basic data.

Over the last 6 months I have made a number of seed investments and have shared the following company update with them. Each CEO has had their own minor tweak but this should give you a sense of what investors may be looking for and how it can help you streamline your communication and focus on how to extract value from your many investors. If you choose to update weekly then obviously it will most likely be a shorter piece with maybe only the cash burned and current cash on hand as the financials. If you choose to send out a report monthly then it may be more like the form I have uploaded on docstoc.

One other important note I forgot to highlight is that since many companies I invest in are web-based and therefore many of them have real-time metrics I can track. Michael Robertson who started Mp3.com and Gizmo5 (sold to Google Voice) had one of the best real-time dashboards for tracking his business. I could see number of downloads, minutes used, new paying customers, etc. whenever i wanted to by logging into the system. Other companies have created an investor wiki or use status.net (full disclosure-a BOLDstart seed investment) or other communication platforms for investors to share ideas and information. I only imagine this will even get only better in the future.

Anyway, enjoy and I hope to hear some feedback on what is missing or what may be too much information.

]]>http://www.beyondvc.com/2010/10/standard-investor-update-for-startups.html/feed6Scaling your management stylehttp://www.beyondvc.com/2010/09/scaling-your-management-style.html
http://www.beyondvc.com/2010/09/scaling-your-management-style.html#commentsThu, 30 Sep 2010 08:21:15 +0000http://localhost/t2wp/2010/09/scaling-your-management-style.htmlAfter meeting with a number of entrepreneurs I recently seed funded, it was clear to me that one of the major challenges founders face is how to continue to scale their management style. My preferred seed investment is in an engineering driven/product focused team who can code and get product out the door under the release early and release often model. I often find that these types of entrepreneurs get quite a lot done with few resources and really have a strong pulse on the customer and market. However the unfortunate aspect for these technical/product founders is that as their product becomes more successful, they often spend less time on doing the things they love - creating great product and iterating. Many founders will find that they have to spend more time meeting with investors to raise money and dealing with internal employee issues. In addition, many founders will find that once they raise capital and hire more people, that their one room, one whiteboard open management style is hard to scale. So the question is how to get everyone on the same page? How do you continue to be open and yet layer a simple process to create a shared vision and accountability? Given that, I am bringing back an old post from 2007 on scaling your management style. I want to be very clear though - do not be a slave to process and keep this simple. At the same time, I hope some of these suggestions help:

What makes a startup team great early on in terms of getting product out the door and rapidly refining and honing the product from live market feedback can also lead to issues down the road if companies and employees are managed on a similar basis. What is easy to roll out in a 5 person company gets harder to manage in a 25 person and even harder in a 50 person company. Take the test - ask your key executives what the 3 key company goals are for the month? Are they the same or not? How will they help contribute in each of their functions to delivering on the 3 key company goals? If they are not on the same page and you have trouble getting them together, you may want to continue reading for some thoughts on how to improve communication and accountability.

Here are some simple steps you can take to create a more fluid organization. First, institute a weekly management meeting. Yes, like you, I have an allergic reaction to the word meeting, but believe it or not, simple processes can help tremendously. It is a great way for the CEO to get input but also guide the team to focus on the same company goals for the month or quarter. Secondly, have key team members provide a weekly dashboard report and list of key goals to accomplish for the following week. At every weekly management meeting, have each team member discuss progress against his/her team's goals and what they will be working on for the following week. How does each of the departmental goals contribute to helping the company meet its goals? Once again, this all may seem simplistic and a giant waste of time versus managing the next product release, but you will be amazed at the number of companies I meet that have not gotten to this point and consequently seem to have different ideas of what the business is and how to get there. In addition, having weekly management meetings and clear weekly goals with simple yes/no criteria goes a long way towards creating an action-oriented culture of getting results. If a VP doesn't deliver consistently, all of the other executives know and they also know it is time to make a change. No one wants to be the manager that is known to overpromise and not deliver. There is also a real difference between a manager having weekly individual meetings with their CEO vs. openly discussing theirr priorities and completed tasks with their peers. With respect to cross functional communication, rather than complaining about engineering, for example, sales and marketing can now understand engineering priorities and what it may take to adjust and rearrange some of them to meet the revenue targets for the quarter. Trust me, there are many more factors to a company's success and failure, but please don't make an allergic reaction to scheduled meetings and a simple lack of organization your cause for execution problems.

In fact, we can skip the word weekly report, and instead just say lay out the 3 things you were supposed to do this week and where you stand on them. One other important point to note is that make sure that everyone on your team understands if they hit a roadblock on any of their goals to come to you immediately to tell you what the roadblock is, a couple ways to potentially resolve the issues, and then to discuss with you. Clearly this is a methodology that can scale as you grow your team and business. Good luck and remember to keep it simple.

]]>http://www.beyondvc.com/2010/09/scaling-your-management-style.html/feed4The consumer Internet business is not easyhttp://www.beyondvc.com/2010/09/the-consumer-internet-business-is-not-easy.html
http://www.beyondvc.com/2010/09/the-consumer-internet-business-is-not-easy.html#commentsTue, 28 Sep 2010 13:47:52 +0000http://localhost/wp_beyond/?p=6It's not easy to build a service that everyone loves and even harder to build one that gets 3000 new users a day on an installed base of 2 million users. Once there you may think of yourself in the drivers seat as having built a successful company. Unfortunately, this is where the need for revenue comes to play. As a startup you can only raise external funding for so long before you generate your own cash flow to pay for operating expenses.

Given these facts, I was quite saddened to read the blog post today from Todd Agulnick, Co-Founder and CTO of Xmarks, Inc. In the post which I believe is a must-read for all entrepreneurs, Todd lays out how he started the company, built it, and tried multiple times to create a revenue model from the incredible number of users and data he amassed over a few years. As Todd states:

We spent the next year turning over every conceivable rock looking for ways to use the data in our corpus that would prove compelling to our users and revenue-generating for us. Some of these ideas, like SearchTabs, saw the light of day; others never made it out of the lab. Our “SearchBoost“, service was an upsell to advertisers: pay us a fee and we’ll add a mark to your ad when it’s displayed to our users, showing the bookmark rank of your site. Our tests showed that we could boost ad click-through rates by 10%. We built it and it put it front of potential advertisers. Many were interested, but ultimately the feedback was negative: our user base was too small to be worth their time and attention.

As evidenced from above, it sounds like Todd and his team tried every conceivable way to build a business out of their awesome product. If you are an entrepreneur you have to remember that building a consumer Internet business is not easy! Even though Xmarks jumped over 3 of 4 huge hurdles -building a great product/service, amassing users, and growing quickly, it was still not enough to build a scalable revenue model. Does this mean that I expect entrepreneurs to have a sustainable revenue model from Day 1? Definitely not but on Day 1, I do want to hear about the various ways you may generate revenue in the future. I also want to point out that advertising will most likely not work for your business unless you can generate a significant amount of traffic, way more than you even think you are going to need today. And finally like Xmarks, it may not work the way you dreamed it would but please take all of those lessons learned to your next startup as you will be all the wiser with the experience you had.

]]>http://www.beyondvc.com/2010/09/the-consumer-internet-business-is-not-easy.html/feed1EMC buys portfolio company Greenplum – more behind the storyhttp://www.beyondvc.com/2010/07/emc-buys-portfolio-company-greenplum-more-behind-the-story.html
http://www.beyondvc.com/2010/07/emc-buys-portfolio-company-greenplum-more-behind-the-story.html#commentsWed, 07 Jul 2010 07:19:18 +0000http://localhost/wp_beyond/?p=8Congratulations to Greenplum and Scott Yara, Bill Cook, and Luke Lonergan in particular! It has been quite a roller coaster ride over the last 10 years and there were a number of times we stared at the abyss only to come back stronger. This is a story of great people and incredible perseverance. The great news is that we leveraged two strong trends early on - the era of big data and the need for cheaper and better solutions and the fact that hardware is a commodity and the value is in the software. We also leveraged the open source database platform PostgreSQL as the initial foundation for our technology. After all these years, I am glad to see that EMC and others have caught on to both of these facts.

Little do people know that when Dawntreader first funded Dali Media along with Impact Venture Partners and Primedia Ventures that the company was called Dali Media and then Metapa, standing for media to all places. This was the year 2000 and the idea was that Metapa would allow any company to send any media asset over any content delivery network and our service would automatically transform the asset for viewing anywhere. We did have some large initial customers but quickly realized that we were far from capital efficient in a market crash and that we would have to refocus and restart.

Enter Phase II where we made a number of changes and ended up using our software for some data anaytic projects. Frankly we did this to keep ourselves around long enough to figure out what to do next. Luckily we had a number of large paying clients that allowed us to sustain ourselves with a little extra cash from the founders and my fund. Enter Didera (backed by Hudson Ventures) which had a database clustering solution which would allow us to take our data analytics solutions on to commodity clusters. We bought that company in 2003 and invested some more capital.

We launched an initial prototype, landed a few customers, and brought in Mission Ventures as a new lead investor for the restart of the company. A few months after closing that round, we changed the name to Greenplum. This is also when we had to stare at the abyss for the third time. Although we had a couple of great customers, we discovered that our software would not scale to the desired level. I vividly remember the day that Scott Yara and Luke Lonergan came in to the room to tell us that we had serious problems and that we would have to start development over and scrap the old architecture for a new one. Our initial reaction was disbelief and then anger as we saw our venture money and the team's efforts go down the drain. However, what we also saw was a founder and team full of integrity so Mission and Dawntreader along with the founders decided to pump some more money into the company. It was a painful process as we had to let go of the sales team that had built initial momentum and we had to hunker down and restart. However I see that moment as the critical turning point for the company as well.

9 months later we had rebuilt the architecture, relaunched, and landed a couple more great customers. Enter Sierra Ventures and our first big round of capital which also allowed us to bring Bill Cook as CEO. The one moment that stands out in my mind was when we were interviewing Bill for the CEO position. Since he was based on the west coast, he had already met with the other investors. We started with a phone call and within 15 minutes, Bill decided to get on a redeye and meet me for breakfast to continue our interview. What I saw in Bill and the rest of the team was how to get deals closed and the desire to do what it takes to make things happen. Needless to say Bill brought that same culture to the company which took us to where we are today. Eventually Meritech came in and led a new round and then we were off to the races.

However, the moral of this story is that sometimes your startup won't grow in a straight line and many times you may take one step forward, two steps back, and then 5 steps forward again. Secondly, from personal experience, if you have the right team who is passionate and understands how to be flexible in the face of difficult market conditions, you can still build a great company. When we sold GoToMyPC to Citrix, we also restarted the company from the initial business model that we had and did a complete 180 degree change. I am not advocating that you try to do this but only proving the point that entrepreneurs will probably fail on their initial model and may have to make changes to their business. Success can be attained in a big way under that scenario so don't quit. The guys at Dali Media, Metapa, and Greenplum surely did not and created a phenomenal exit for all involved. Best of luck at EMC building a killer business in this new era of Big Data!

P.S. There is much more to this story and many more lessons to be learned - I will do my best to share some other tidbits in the future such as how companies are bought and not sold, how our partnering strategy helped us grow, how we dealt with competition, etc...

]]>http://www.beyondvc.com/2010/07/emc-buys-portfolio-company-greenplum-more-behind-the-story.html/feed84 Types of CEO Behavior when Dealing with Boardshttp://www.beyondvc.com/2010/04/4-types-of-ceo-behavior-when-dealing-with-boards.html
http://www.beyondvc.com/2010/04/4-types-of-ceo-behavior-when-dealing-with-boards.html#commentsFri, 30 Apr 2010 07:33:10 +0000http://localhost/wp_beyond/?p=9As I have stressed over the years, it is imperative for board members and their management teams to have open dialogue. If you are a CEO, I encourage you to share more rather than less information. One of the best tools that a number of our CEOs use is a weekly email summarizing by department what their goals are and what they have accomplished during the week. In fact, they even share that email internally so everyone in the company knows what is going on. For board members this eliminates redundant questions and allows us to focus on the issues at hand instead of fact gathering. And yes, everything is in there - good or bad. I have written some prior posts on this topic such as "Communicating with Your Board" and the "VC-Entrepreneur Relationship." Along these lines, I would also say that I have observed that CEOs tend to fall into certain patterns of behavior when dealing with their board. To that end, I have attempted to summarize some of these patterns and the pros and or cons related to them.

1. Yes-Man: This is pretty self-explanatory. Whenever the board tells the CEO to go into a certain direction, he/she does. If it means the board telling the team to launch a Facebook or iPhone app just like everyone else, then they do it. Initially for the VC this may seem great but in the long run this can be quite detrimental to the company and value of the business. If the VC/board member is dictating everything from strategy to product features, then what is the CEO and management team doing? At this point, you are running the company and not the entrepreneur. What this means is that it is time to get a new CEO.

2. No-Man: The No-Man is the CEO who gets ultra defensive whenever a board member asks for information or provides thoughts on how to help create more value for the business. He/She always says no at any board suggestion and many times does not even have a good reason for saying so. They say no simply because they don't give a crap about their board and they want to run the show and take zero advice. Saying no is not necessarily a bad thing as many board suggestions may end up having you chase your tail but as a CEO I would encourage you to use some tact when dealing with your board. That is where CEO behavior #4 comes into play. In the end, if a CEO is a No-Man then ultimately the board will replace him/her in the long run because it will be impossible to work with one another due to the hyper-defensive stance taken by the CEO.

3. Yes but No: This is one of the worst behaviors. The Board asks the CEO to research a certain path and the CEO agrees. The Board checks in 2 weeks later and nothing has happened. The CEO consistently tells the Board it will do something but his/her actions are the complete opposite. In fact, this inaction is really a Big F-U to the Board and tells us the CEO has no spine to disagree with the Board and probably does the same with his management team. This kind of behavior is simply unacceptable and ultimately results in dismissal as well.

4. Open-minded: This is the best type of behavior. This type of CEO usually says No immediately when something doesn't make sense and gives reasons why. When he/she agrees with a suggestion, it is duly noted as well. Finally, when this CEO does not understand something, he/she agrees to research further and get back to the board. No our feelings are not hurt if you say no. In fact we will respect you. At the same time, we may have a few nuggets of wisdom to share as well so keeping an open mind is beneficial to all. And if you don't know whether you agree, researching further can only help get a better answer. This behavior is definitely conducive to a strong board relationship and will keep you in the CEO seat longer. Yes, this does not mean that you can execute but this is definitely one measure of the many that board consider in their CEO success profile.

Ok so I outlined 4 CEO behaviors when dealing with boards, only one of which is positive. At the end of the day, the Board-Entrepreneur relationship is a give-and-take one. Both sides have to be willing to express their thoughts (diplomatically) and have an open dialogue. The Board does not know your business better than you and if you disagree, tell us immediately. If you agree, tell us immediately as well. We all don't have time to waste and dancing around a topic does not help anyone get a better result. As an entrepreneur, guide the board as well-tell us where you need/want help. This relationship will have friction at times but don't let it get personal. Friction is good-that is how everyone gets to a better decision point. I hope this helps. Remember the management team is running the business, not the board, and the board is there to help guide you strategically and make sure you don't make the same mistakes we have seen from numerous other companies.

]]>http://www.beyondvc.com/2010/04/4-types-of-ceo-behavior-when-dealing-with-boards.html/feed4Is it a feature or product?http://www.beyondvc.com/2010/03/is-it-a-feature-or-product.html
http://www.beyondvc.com/2010/03/is-it-a-feature-or-product.html#commentsTue, 30 Mar 2010 12:22:35 +0000http://localhost/wp_beyond/?p=12During the last month I have spent more time looking at Angel investments as I believe it is a great time to start a business. However, one key question I keep asking myself after meeting with entrepreneur after entrepreneur is whether or not what they have is just a feature of a larger product offering, a standalone product in and of itself, or a business for the long term with multiple products. Each path provides a unique risk reward perspective for both investors and entrepreneurs.

To be honest with you, many of the companies I have met with seem like features of a broader product offering. That is not bad in and of itself as focus is key when starting a company and going to market. As a start-up, you always want to be the innovative player with the new easy to use technology. However, just being the mobile version of what is already existing in the market is a cause for concern as it doesn't take much for a larger competitor to replicate that effort and use its marketing muscle and existing customer base to freeze a start-up out. Sure, you may get some customers early on as you are the only one, but in the long run you need to think about what broader feature set you will offer to be a true standalone product.

A product is typically a couple key features tied together to solve a problem for a customer. This means that you can provide more value to your customer and consequently extract more dollars from your end-user. The opportunity for many companies that are just features is a quick flip, but the risk is if that doesn't happen the large player may just develop the feature in-house leaving no exit for you. The more seasoned entrepreneurs know that starting out with a killer feature is just a launching pad to bigger and greater things. They know it is just a go-to-market strategy that is part of a larger vision and a step towards a broader offering down the line. These entrepreneurs know that they may never get there, but also understand that without this they have a limited market and return opportunity. yes, I know start-ups are inherently uncertain and many times it is difficult to even calibrate how big the market is, but don't forget to lay out the broader vision beyond the initial killer feature when building your company.

On the flip side, what I don't advocate is coming out of the gate as a complete and whole product solution. This brings you right into the crosshairs of large, incumbent players and makes your life much more difficult as you have to sell against a much larger salesforce with significant marketing muscle. While your goal may be to grow to that kind of solution, start highly focused, features are ok, but have a broader vision to show a path towards building a great company.

]]>http://www.beyondvc.com/2010/03/is-it-a-feature-or-product.html/feed4Market positioning for startups – focus, focus, focushttp://www.beyondvc.com/2010/01/market-positioning-for-startups-focus-focus-focus.html
http://www.beyondvc.com/2010/01/market-positioning-for-startups-focus-focus-focus.html#commentsFri, 22 Jan 2010 12:43:12 +0000http://localhost/wp_beyond/?p=14I was on a call yesterday with an inspired and talented management team. As we walked through the deck, one point particularly struck me as I listened to their well-honed pitch. The company was trying to boil the ocean and do everything for its customers. While it was great that the team seemed to understand the market and the problem that their customers had, I must say that I started to lose interest by the fifth differentiating feature of the product/service. One slide really highlighted the problem for me - it showed a feature list of 10 features and then showed 3 different competitors who were either already well established public companies or well funded startups that only offered 30% of what this angel-funded startup would offer. In my mind I was wondering how an angel funded company could go-to-market against companies with billion dollar market caps or with $30mm of venture funding which were highly successful because they were incredibly focused on a subset of problems that this start-up was trying to solve. I know, I know, I always like entrepreneurs to think big but that must be balanced with how a startup goes to market.

You see, it is always hard for a startup to enter a market with an end-to-end product positioning as most customers expect large companies to cover this territory. What most customers expect from startups is innovation and breakthrough offerings, not end-to-end solutions. Going back to the call, my humble suggestion was for the management team to complete their beta test with their handful of customers and figure out which 2 or 3 features were the most compelling and differentiated offerings with respect to their competition and market. They should then plan their go-to-market strategy with a more focused approach that emphasized a new and innovative offering instead of a "we do it all for you" approach. In the long run, if successful, the startup could always add another feature or two as they grew their customer base but keeping the message simple early on is imperative to drive a successful product launch.

]]>http://www.beyondvc.com/2010/01/market-positioning-for-startups-focus-focus-focus.html/feed11When to ramp saleshttp://www.beyondvc.com/2010/01/when-to-ramp-sales.html
http://www.beyondvc.com/2010/01/when-to-ramp-sales.html#commentsThu, 14 Jan 2010 09:48:00 +0000http://localhost/wp_beyond/?p=15While 2009 was a tough year, I must say that it was nice to see a number of our portfolio companies have blow out 4th quarters for bookings and growth. Despite that, I am still taking a cautiously optimistic approach to 2010. There are still conflicting reports on the growth of the economy and it is unclear whether Q4 was the release of some pent-up demand of if it will be more indicative of sustainable new spending on technology.

Either way, I would like to caution those start-ups out there who are looking to aggressively ramp up their sales based on a great quarter (more on this from a post in 2006 on when to hire a vp of sales). Yes, it is imperative to keep the momentum building but before you get too aggressive with your growth plans make sure you can answer all of these questions about your go-to-market strategy:

1. Do we have a clear value proposition and know which market we are selling into and who we are selling to in the organization?

2. Do we have the right product and are our customers satisfied? - selling is one thing but if the product has serious issues in production then ramping up sales could put a severe strain on the business moving forward

3. Are our sales repeatable or one-offs which means lots of customization of our product on every deal?

4. Is our quarter based on one or two lucky huge deals or based on a broader swath of customers? Do we have a continually growing sales pipeline or did we run it dry for a big Q4?

5. Do we have a solid understanding of the full sales cycle from lead generation from marketing to the closing of the sale - it is important to get good metrics here to make sure that marketing is spending wisely and targeting the right areas of the market to build the pipeline. You need to feel confident that if you spend more on marketing, you will get more leads which will lead to more sales.

6. How can we build a more leveraged sales model through resellers, partners, or OEM relationships - you can't do this without answering #1 above. If you are solely reliant on direct sales then think long and hard about how to add more leverage to the model

In short, if you can answer these questions and the data and anecdotal evidence from the field points you in the right direction, then by all means ramp up your growth. If you can't answer all of these questions in a highly positive light, then cautiously ramp your sales. Too many times I have seen portfolio companies get overexcited about their growth prospects and then realize the product is not ready for primetime or that the pipeline has run dry and subsequently the startup overspends and needs to go through a layoff. Overhiring and then cutting back can be quite negative for morale and can also be a huge cash drain and distraction for management. Just remember to take a step back and do some analysis before you bet the company's future based on a good quarter or two.

]]>http://www.beyondvc.com/2010/01/when-to-ramp-sales.html/feed1Startups and financial models for SAAS companieshttp://www.beyondvc.com/2009/12/startups-and-financial-models-for-saas-companies.html
http://www.beyondvc.com/2009/12/startups-and-financial-models-for-saas-companies.html#commentsThu, 10 Dec 2009 07:11:12 +0000http://localhost/wp_beyond/?p=16The other day I met with an entrepreneur I was advising as he prepared to raise his next round of funding. In the meeting, he wanted me to narrow in and focus on his financial model. Financial models for startups are important from a big picture perspective, but I never like to get mired in the full details as things always change in the early stages. So first and foremost, I let him know that while it was nice to have a well thought out spreadsheet, that the most important thing was getting the product developed and the right team in place. I don't invest based on detailed spreadsheet models - getting comfortable with the team, the problem being solved, and the market opportunity are more important in the early days. Secondly, what is most important for me to understand is the expenses and what milestones will be achieved with this first round of funding and whether or not it would be suitable enough to raise the next round of financing. Finally from a big picture perspective, I like to understand the unit economics of the business - can this really scale, is the company capital efficient, and are there high or low gross margins. While the revenue model may change as well, I like to at least understand going into the investment that the entrepreneur's head is in the right place and that the economics work right from the start.

Given my experience with SAAS based companies like GoToMyPC (Citrix Online now) and LivePerson (Nasdaq: LPSN), we also spent some time discussing key financial metrics for SAAS businesses that he should pay attention to as he ramped up his business. Once again, no startup spreadsheet is going to accurately predict the future, but it is imperative to understand some of the key variables that will drive your business so you can prepare early on to have the right people in place and the right focus. In my mind some of these key variables include new bookings, growth of deferred revenue, churn rate, cost of acquiring new customers, and obviously cash. New bookings are a better indicator of sales growth for a SAAS company because typically contracts are signed for 1 year or more and the revenue is recognized monthly as the service is delivered. So if a SAAS company signed up $1.2mm in bookings for December, it may only recognize $120k each month. The remainder would go into deferred revenue. Another area that is quite important is churn rate. If your company churns or loses 5% of customers every month, then during the course of the year the company will have to replace a significant number of customers just to maintain status quo. What this tells a company is that they while focused on adding new customers, they also have to make sure customer satisfaction is up to snuff and that they keep their existing customers happy. Also if your cost of acquiring a new customer is high and breakeven is longer than the contract length, then your company will never be financially stable if you cannot keep your customers on board. Finally cash is an important metric for all startups - watching the burn rate and being proactive about it can keep you fighting through the lean times and prepared for growth. While many SAAS companies may collect cash monthly or quarterly, some collect annual fees by offering discounts by paying upfront. This is a great way for SAAS companies to keep the cash coming in earlier so they can use it to fuel growth.

]]>http://www.beyondvc.com/2009/12/startups-and-financial-models-for-saas-companies.html/feed3Washers, dryers and secret sauce – why naming your technology is importanthttp://www.beyondvc.com/2009/09/washers-dryers-and-secret-sauce-why-naming-your-technology-is-important.html
http://www.beyondvc.com/2009/09/washers-dryers-and-secret-sauce-why-naming-your-technology-is-important.html#commentsWed, 16 Sep 2009 17:36:06 +0000http://localhost/wp_beyond/?p=20 Researching washers and dryers reminded me of several meetings I had years ago with a marketing expert named Richard Currier. His big thing was to take a basic technology, break it out into a few parts, and to give them sexy names. For example when Sybase the database company was on the market it was fighting with Oracle and others and ended up capturing a big chunk of the financial services market because it leveraged an innovation it called Two-Phase commit. Every sales person would lead in with the benefits of Two-phase commit and while other competitors may have had something like it, if it wasn't Two-Phase commit it wasn't good enough. What Sybase did was take one of its secret sauce technologies (innovative at the time, standard now), named it, and leveraged the crap out of it with its sales force. While the technology performed as advertised, naming it definitely gave it some cache.

Coming back full circle, I had a conversation this morning with an entrepreneur who was going after an interesting segment in the online video and marketing world. The company had some nice revenue for a bootstrapped operation. However I mentioned to the CEO that it seemed more like a one-off consulting or agency shop versus a scalable VC-backable market opportunity. As we dug into his technology deeper and as I started to understand some of the magic behind his platform, I recommended to him that he think long and hard about figuring out what the secret sauce in the backend was and how to name it so he could better market his services and compete against others. While naming it won't in and of itself help him land more customers, I can guarantee that it will help his company sound more exciting and innovative versus companies that do not. And in the end whether the deal is closed the sales prospect will certainly remember and question how important TrueBalance Antivibration and WaveTouch controls are to his purchasing decision.]]>http://www.beyondvc.com/2009/09/washers-dryers-and-secret-sauce-why-naming-your-technology-is-important.html/feed4Lessons from Joosthttp://www.beyondvc.com/2009/07/lessons-from-joost.html
http://www.beyondvc.com/2009/07/lessons-from-joost.html#commentsWed, 01 Jul 2009 07:53:39 +0000http://localhost/wp_beyond/?p=23I am not going to rehash Om Malik's excellent summary of "What went wrong with Joost" but I did want to dive deeper into a few points. As I have always said, raising too much money can be a curse and not a blessing. Here is an excerpt from my post in 2006

Trust me, I love having well capitalized companies. However, having too much money can be a curse, not a blessing. More often than not, I see management lose financial discipline and avoid making hard decisions when capital is abundant and not scarce. To many executives, money does solve all problems. And yes, having money allows an entrepreneur to do many things with his business like hire more talent, scale the back-end infrastructure, and ramp up sales and marketing. On the other hand, when an entrepreneur has too much money, the tendency is to throw more money to fix a problem. Sales are not ramping up quickly enough so let's hire more sales people. Marketing is not generating enough leads so let's spend more money on lead generation. Engineering keeps missing its product release date so let's hire more engineers. And what happens is that more money gets poured in and that only exacerbates the problem as management never really spends the time to dig deep to understand what the underlying issue is and to fix it at the source rather than layer on more resources. In other words, an entrepreneur only hastens his downward spiral by spending more money on an inefficient business strategy.

This to me can kill a company before it even gets off of the ground. Expectations are too high too early, companies will ramp up too quickly, and any misstep is seen as a failure. Secondly, companies that have too much capital usually try to do too many things and lack focus. It sounds like Joost was building a client, negotiating with media partners, and building out its own ad serving technology and had its own ad sales staff. It sure sounds like a big operation.

Another point to add is that companies founded and led by rockstar entrepreneurs are not enough to drive success. Rock star founders and CEOs will definitely open a ton of doors and drive lots of media attention, but the company still has to execute. In addition you want your rock star driving much of the execution rather than hiring a huge staff with layers of bureaucracy. Many of these famous entrepreneurs will typically have their hands in a number of different projects at once. Finally, having been successful before, you really need to assess how hungry these rock stars are for success. Hunger and passion do play a huge role in driving company DNA and creating a winner. I have had just as much success funding entrepreneurs who have had modest wins but were still seeking the big exit. Bottom line is that Joost had a ton of promise but may have been better served by raising much less money at the start and staying highly focused on the task at hand with a much leaner operation.

]]>http://www.beyondvc.com/2009/07/lessons-from-joost.html/feed7I want it NOW, I want it REAL TIMEhttp://www.beyondvc.com/2009/06/i-want-it-now-i-want-it-real-time.html
http://www.beyondvc.com/2009/06/i-want-it-now-i-want-it-real-time.html#commentsTue, 16 Jun 2009 11:14:39 +0000http://localhost/wp_beyond/?p=25I was recently asked by a friend if he should get his son the new Nintendo DSi. This would be an upgrade from the current DS and also add the photo capability. As I thought about my own son's usage of the device, I said no. Once my son got an IPod Touch for music and now games, he never looked back. While he loves the music, the real reason is because of the App Store and ability to instantly download any game for free instantaneously. While the DSi does have a Wi-Fi connection, the IPod Touch is just so easy and frictionless. And as evidenced by the rise of the Internet and the ability to download movies, music, and games instantaneously, it got me thinking more and more about the fact that we live in the "Now" or "Real Time" Generation. Yes, it has been happening for awhile but we finally have the broadband speeds and ubiquitous connectivity that we craved for the last 10 years. We also have better pricing and better products to be able to download those movies and games anywhere and on any device. In addition, you can just see the rise of Twitter as another example of this new culture of real time. People no longer want to wait for anything any more - if you have something to say, say it on Twitter or Facebook. Products and friends are just a click away.

Sure, we can clearly see the impact of the Now Generation on consumers and new web applications. A substitue product or application is just a click away. If you don't like the user interface, if the product loads too slowly, or if the registration process is too burdensome, you can do another Google search and instantly find a substitute. But what does it mean for the enterprise, for the corporate IT professional and startups selling into these companies. I have always believed that the old way of selling enterprise software products with expensive sales forces and complicated installations is dying. Buyers no longer want you to push software that they may or may not need. They are empowered and can easily do their own Google search and download open source software or fill out a short registration form to trial a web-based app. They, like my own son and his friends, are increasingly seeking instant gratification. They are not just consumers but prosumers who are pulling new products into their departments and potentially into their enterprise. I wrote about this instant gratification in 2006 and it is happening faster than ever. The kids who were in college 5 years ago are the very same ones in the IT department tasked with coding new products. They are used to doing more for themselves, doing their own research, and being able to trial new applications in real time. If you are an entrepreneur selling into an enterprise and don't see this trend now, you will be toast in the future.

]]>http://www.beyondvc.com/2009/06/i-want-it-now-i-want-it-real-time.html/feed1Occam's Razor and the current state of venturehttp://www.beyondvc.com/2009/06/occams-razor-and-venture.html
http://www.beyondvc.com/2009/06/occams-razor-and-venture.html#commentsTue, 02 Jun 2009 09:41:10 +0000http://localhost/wp_beyond/?p=26I have made many posts in the past about focus and doing more with less, and as I continued on this path it reminded me of Occam's Razor, the idea that the simplest explanation to any problem is the best explanation. Of course Occam's Razor can get more complex but over the years it has been associated with the idea that "less is more." And when I apply this philosophy to the current state of venture, I can see many applications of this theory.

From a VC fund perspective, there has been much discussion about how venture funds have become too large to deliver outsized returns. First with the lack of an IPO market it is much harder to generate $1.5b for investors on a $500mm fund then it is to deliver $300mm on a $100mm fund. Secondly having too large a pool forces VCs to invest much larger amounts of capital into companies pushing up valuations and also exit hurdles for success. Finally, as I have written in the past, I have learned firsthand the problem of giving companies too much money too early. It can lead to a growth at all costs mentality, a lack of focus which means chasing too many opportunities at once, and a lax attitude on how to generate revenue. Enter Occam's Razor as it seems that the new trend is for smaller groups of GPs to form smaller funds to be able to invest in earlier stage companies. With the new operating model of capital efficiency, a little amount of money can go a long way and help VCs generate excellent returns at much lower valuations. Having a smaller fund allows VCs to write smaller checks and take advantage of the current market.

From an entrepreneur's perspective, Occam's Razor can be applied to many different avenues. As we all know, a great entrepreneur must be able to effectively allocate his scarce resources of time and money to fulfill a market need. The longer it takes to develop a product that the market wants means that it will cost more money and that it also opens the door for a competitor to step in before you. If you look at the current Internet and SAAS market, the idea of "release early and release often" certainly fulfills the Occam vision. Rather than spend cycles creating the perfect product with every bell and whistle, many nimble startups have focused on a more reductionist theory of releasing an often simpler product quickly with the idea of getting market feedback for the next iteration.

Occam's Razor also applies to how an entrepreneur should operate his business. Don't pursue too many markets at once, focus on what is delivering the most return for the dollars invested, and hire people and scale your business when you absolutely have a repeatable revenue model. I have been burned like many others by aggressively building out a sales team too early without a repeatable sales model. In addition, from a sales and marketing perspective, we have seen a movement to more of a frictionless sales model where there is less hands-on interaction with customers selling and delivering a product. This would include customers being able to go online and sign up for free trials or download software versus having an expensive direct sales force sell million dollar licenses and one month of professional services to install a product. Finally and most importantly, the idea of less is more certainly applies to raising capital. With the rise of open source software and cloud computing, companies can now get started with less dollars and scale more cheaply and efficiently than before. As all entrepreneurs know, raising less capital means retaining more ownership.

In summary, it is becoming increasingly clear that Occam's Razor and the idea of less is more will continue to spread as the cost of technology continues to decrease, as entrepreneurs get even more efficient in building businesses, and as a non-existent IPO market and the factors above lead more VCs to create smaller more nimble funds to capitalize on the new market realities.

]]>http://www.beyondvc.com/2009/06/occams-razor-and-venture.html/feed1Inspirational video for entrepreneurshttp://www.beyondvc.com/2009/05/inspirational-video-for-entrepreneurs.html
http://www.beyondvc.com/2009/05/inspirational-video-for-entrepreneurs.html#commentsTue, 12 May 2009 10:47:56 +0000http://localhost/wp_beyond/?p=27Jonathan Kay from Grasshopper sent me a great video on entrepreneurship. First I love the inspirational message. Secondly, I like the use of a viral video to cleverly promote his virtual PBX numbers for entrepreneurs. Take a look and hopefully it will brighten up your day.

What I love about the message is that entrepreneurship is not about making money but about pursuing a passion and doing your part to make great products to make the world a better place. OK-it may sound a little hokey but I remember during the bubble how entrepreneurs would come in talking about how much money they would make for everyone but have no passion for their product. And guess what, many of these monetary focused entrepreneurs were the first ones to quit when the world got tough. Without a bigger sense of purpose, it is hard to be an entrepreneur and stick through the inevitable tough times that will come your way.

]]>http://www.beyondvc.com/2009/05/inspirational-video-for-entrepreneurs.html/feed4Pioneers get arrows in their backshttp://www.beyondvc.com/2009/04/pioneers-get-arrows-in-their-backs.html
http://www.beyondvc.com/2009/04/pioneers-get-arrows-in-their-backs.html#commentsWed, 29 Apr 2009 15:21:38 +0000http://localhost/wp_beyond/?p=28Pioneers get arrows in their backs - I have experienced it firsthand from an active investor's viewpoint and written about it in the past. Being early in a market is great but being too early can be deadly. Just like the settlers in the westward migration, entrepreneurs who are too early will get arrows in their back. It doesn't matter if you have a rock star CEO (Bill Coleman who founded BEA) and $100mm of funding from some great investors. If you are too early and have to spend lots of money educating a market and get engaged in long protracted sales cycles and pilots, you are not going to be able to spend your way to success.

That is what it seems like is happening to Cassat Software. Forbes has an article about Cassat nearing the end. On the surface it seems like the company was built for the right place at the right time helping enterprises save tons of money and run their internal data center like a cloud. However the first funding went in 6 years ago and has totaled around $100mm since then. Here is a quote from their founder and CEO:

For many years, Coleman acted as something of a prophet for cheap computing via the cloud, but he also thought it would mean a sharp drop in pricing with which the big companies would not be able to compete.

"The big guys copied my story," says Coleman. Cassatt, he adds, was upended by a slowing economy and by customers skittish about closing big orders or changing existing ways.

"What frustrates me is my own naivete," Coleman told Forbes. "I thought I could give companies something radical that had a proven return on investment, and they would be willing to change all their companies' computer policies and procedures to get that. Right now, it's hard to get people to get beyond proof-of-concept tests or a data center energy analysis."

He will be right eventually but will not have a lot to show for it. A couple points to make - raising too much money too early can be harmful as it puts huge expectations on a company before it has proven itself and selling million dollar plus licenses into enterprises has gone the way of the dinosaur as only the biggest companies can afford to do this and it is extremely expensive to do. Remember some of my old posts about frictionless sales and leveraging the web for sales/marketing and inside sales? Having just participated as an angel in the recent Eucalyptus funding led by Benchmark, we are hoping to avoid this fate leveraging free download model which has generated over 14 thousand users, many of whom are corporate customers. In addition, we have signed partnerships and are bundled in the Sun cloud computing initiative and the new Ubuntu enterprise Linux release. Got to love leveraging partners and downloads to drive sales leads and sales.

]]>http://www.beyondvc.com/2009/04/pioneers-get-arrows-in-their-backs.html/feed6Growing your business in a recessionhttp://www.beyondvc.com/2009/04/growing-your-business-in-a-recession.html
http://www.beyondvc.com/2009/04/growing-your-business-in-a-recession.html#commentsTue, 14 Apr 2009 15:47:28 +0000http://localhost/wp_beyond/?p=29I read a great article by James Surowiecki in the New Yorker the other day titled "Hanging Tough." In the piece, James gives a historical perspective on companies that thrived and grew during previous recessions by increasing spending on on advertising and R&D. While I am not advocating that companies go out and blow their cash on ads and spending on far-out development projects, I do want my readers to understand that it is possible to gain market share during difficult times.

One way to read these studies is simply that recessions make the strong stronger and the weak weaker, since the strong can afford to keep investing while the weak have to devote all their energies to staying afloat. But although deep pockets help in a downturn, recessions nonetheless create more opportunity for challengers, not less. When everyone is advertising, for instance, it’s hard to separate yourself from the pack; when ads are scarcer, the returns on investment seem to rise. That may be why during the 1990-91 recession, according to a Bain & Company study, twice as many companies leaped from the bottom of their industries to the top as did so in the years before and after.

A personal example that sticks with me is of former portfolio company GoToMyPC which is now Citrix Online. We had our huge exponential growth years from 2000-2004 during a difficult time in the technology markets. And yes, we did increase our spending on ads and at one point in time became one of the largest advertisers on the web. However, what we did was negotiate for pay for performance contracts where we would only pay if we signed up new customers. While not a novel idea today, it was quite novel back in the day. Subsequently we were able to turn a fixed cost that could have been a huge cash drain on the business into a variable cost. In addition, our ads had tremendous impact because every other competitor was not advertising and our brand became quite recognizable. Were it not for our creative and aggressive approach to acquiring customers, I would argue that while we would have been ultimately successful it certainly would have taken a lot longer. So reread the article and think about ways that you can creatively grow your business by turning a fixed cost into a variable cost based on revenue growth and you may find a way to efficiently grow while managing your precious cash. Remember in times like these, everyone is willing to negotiate and what may have been a hard deal to come by 2 months ago may be possible today.

]]>http://www.beyondvc.com/2009/04/growing-your-business-in-a-recession.html/feed8Cover the basics before you raise capitalhttp://www.beyondvc.com/2009/04/cover-the-basics-before-you-raise-capital.html
http://www.beyondvc.com/2009/04/cover-the-basics-before-you-raise-capital.html#commentsThu, 02 Apr 2009 10:54:56 +0000http://localhost/wp_beyond/?p=30No matter how many times I told my friend that he needed to get a deck together for a potential capital raise and model out some thoughts on market sizing and financials, I ran into resistance. It was not because he didn't think it was important or that it mattered. It was because he was understaffed and going 60 miles per hour trying to get a product released. I can understand that pain but at the same time, if you want to raise capital from anyone, you need to have the basics covered.

Fast forward 6 weeks from that last conversation, and we ended up having a meeting with a "friendly" VC to receive some market feedback on where his company stood and what needed to get done to raise capital. And sure enough, it didn't take long for my friend to be questioned on the revenue model, potential market size and opportunity, and how long the cash would last. Of course, he did have some strong answers but they were not what the VC was looking for - it was not quantitative enough. We all know that coming up with market sizing and revenue forecasts for a startup is as accurate as the weatherman predicting the weather. That being said, VCs want to understand the logic behind the numbers as much as the numbers themselves.

Overall the meeting went as I suspected it would - a VC who was very interested in the product but also highlighting the fact that the revenue model was not clear. The kiss of death for me on the revenue side was when the entrepreneur said that he would monetize the company like Facebook and Twitter. Hmmm? We all know that Facebook and Twitter are unbelievable web phenomenons and suck up incredible user attention. And yes I am sure that Twitter will find a way to monetize the stream of data flowing through the system and I am sure that Facebook has tremendous value. That being said accumulating users and worrying about revenue years from now is yesterday's news. Unless you have tremendous scale when you show up at a VC's door, then don't bank on ad revenue as your only revenue source. We have seen the market numbers-overall online ad revenue declining but search revenue increasing. In addition we all know that social apps on the consumer side have incredibly low CPMs and that you need massive numbers to turn into a business. So if you want to get funded, you better have a clear answer on how you will make money and either be implementing that model today or in the short-term. What VCs are looking for is a revenue model today that makes sense - this can include premium subscription revenue, analytic revenue, and even lead generation revenue, but don't ptich massive scale and advertising as your go-to revenue souce 24 months from funding. You will be shown the door quite quickly.

]]>http://www.beyondvc.com/2009/04/cover-the-basics-before-you-raise-capital.html/feed4Taking advantage of the horrible environmenthttp://www.beyondvc.com/2009/02/taking-advantage-of-the-horrible-environment.html
http://www.beyondvc.com/2009/02/taking-advantage-of-the-horrible-environment.html#commentsFri, 20 Feb 2009 14:53:54 +0000http://localhost/wp_beyond/?p=33My expectations for 2009 are that things will get worse before they get better. On the portfolio company side, I would rather have my companies growing at a lesser rate getting closer to breakeven than growing too aggressively and burning lots of cash. Once your house is in order (see some earlier posts I made on this topic), I do see opportunities to take advantage of this environment.

As we all know, in a distressed environment prices come down. So while now may not be the best time to sell your business as multiples and valuations have come down significantly, it could be a great time to pick up technology to expand your product line. In a world where everything is cheaper, those who are strong enough to make moves can find some great opportunities. One of my portfolio companies, netForensics just did that as it picked up High Tower Software in an asset purchase. What this does is allow the company to offer its customers the ability to manage the entire security compliance lifecycle - from log management to a complete security operations center - for all sized organizations, from the smallest departmental installation to the largest enterprise. In other words, this filled a huge gap in our product line and on our product roadmap and allows us to deliver these capabilities ASAP.

So in a world where everything is cheaper, you may be able to pick up some great assets at great prices as long as you have your house in order. Rather than being a distraction, this fit right into our product roadmap and accelerated our product strategy. One other way to take advantage of this environment is by hiring great people. There is lots of talent in the market, and it is clear that expectations for total compensation have come down over the last year. Be on the lookout for these A players so you can continue building your business and be prepared for when the tides turn.

]]>http://www.beyondvc.com/2009/02/taking-advantage-of-the-horrible-environment.html/feed0Positioning and pitch decks for startupshttp://www.beyondvc.com/2009/01/positioning-and-pitch-decks-for-startups.html
http://www.beyondvc.com/2009/01/positioning-and-pitch-decks-for-startups.html#commentsThu, 29 Jan 2009 12:12:06 +0000http://localhost/wp_beyond/?p=36A friend of mine is putting together his first deck for potential investors. In typical startup fashion, they launched a product, got a number of users, and then iterated several times to improve the service. With the product in the hands of tens of thousands of users, they started getting inbound requests from larger organizations who were willing to pay for customized and private group related services. While Version 2.0 will be released to the greater world in the next 6-8 weeks, you may be interested in what I had to say about the pitch deck.

IMHO, a great pitch deck is concise (15 slides) and highly focused. And in the deck I like to see the following points covered (yes, this is my preferred order):

One/Two sentence pitch for company -value proposition (1 slide)

Brief history - founded when, capital raised to date and from whom, capital needed in new round (1 slide)

Who/Team - give me some context of who you are, your backgrounds, success/failures so I can get an idea of your ability to deliver and surround yourself with experienced talent, also include any board members or advisory board members that may be relevant (1 slide)

What's the problem? - too often I see pitches where the entrepreneurs dive right into the product and I scratch my head thinking why in the world we need another lifestreaming service or social network or ad network (1 - 2 slides)

How do you UNIQUELY solve the problem? - solving the problem just like everyone else is not exciting. You need to show how you solve the problem UNIQUELY and ultimately deliver a 5-10x improvement for the customer in terms of ease of use/functionality and cost. What this boils down to is your simple product pitch. (1-2 slides)

Product/Tech - make sure to tell me about your secret sauce or core tech that enables you to deliver a unique service - screen shots, overview, etc - could be good time to go into demo in a live meeting (1-2 slides)

Customer traction - is product in hands of customers? if so, how long in market and share some data on users or beta customers or customers (1-2 slides).

Market size/Competitive Overview - how big is the market and how do you come up with that number - how are you positioned in the market - show graphically maybe by offering or value proposition (this is where you get your typical top right hand corner Gartner like quadrant). A sin is to tell me you have no competition (1 - 2 slides)

GoToMarket Strategy - how will you grow quickly and in a capital efficient manner? How will you sell your product - online, direct, or indirect sales? any potential partners signed or game changing partners that will help you deliver? (1 slide)

Business/Revenue model - show me that the economics of your business work - note that single digit gross margins will get you thrown out the door pretty quickly (1 slide)

Financials - yes I know for early stage customers it is at best a guesstimate but give me an idea of how this will grow, what the revenue numbers look like over the next 3 years to give me an idea of how the business scales, and ultimately it helps me understand the true cash needs for the business to get to breakeven (1 slide)

The financing round - lay out the dollars you are asking for, how it will be used, and how long the cash will last (1 slide)

Milestones-what milestones have you hit so far and what do you plan on realizing during the next year with the new cash (1 slide)

Ok, pretty basic and that's it. For those of you have triskaidekaphobia or fear of the number 13, it's ok as it is a lucky number in our house since my wife was born on the 13th. Anyway, if you cover all of these points the deck should be about 15 pages in length and provide a great overview for potential investors. One other point that I want to highlight is that how you position your business is key. Take a look at this post from April 2004 titled What Aisle, What Shelf. You need to make sure that your audience gets where you fit in the ecosystem quickly and how you are different from what else is out there.

UPDATED: One item I forgot to mention: in this world of constant digital bombardment, you must figure out how your product or service becomes a "must-have" versus a "nice-to-have" solution in a customer's daily life. If you are a "must have" with minimal substitute products then people will clearly pay for what you have. If you are a "nice to have" in a world of many substitute products even though you may get some usage you will never be able to monetize that base.

]]>http://www.beyondvc.com/2009/01/positioning-and-pitch-decks-for-startups.html/feed6More reasons to watch your burnhttp://www.beyondvc.com/2008/10/another-reason-to-watch-your-burn.html
http://www.beyondvc.com/2008/10/another-reason-to-watch-your-burn.html#commentsWed, 22 Oct 2008 17:29:36 +0000http://localhost/wp_beyond/?p=41Despite these tough times, there are still some bullheaded companies who think they can grow their way out of this mess or find the right M&A partner to bail them out. I can guarantee you that this is a recipe for disaster. I was on the phone today with the CEO of one our portfolio companies, and we were joking that we were in unprecedented times since we have been approached by a number of bankers about buying companies that are much larger than us. So if these bigger private companies are hawking themselves looking for a deal, where does that leave a small startup?

It goes back to my one of my themes about building a business - focus on what you can control and don't try to find a savior by looking at external forces. What this means is figure out what your core business is and take a scalpel and lop off the areas where you do not see an immediate return on investment. If you believe you will find a strategic partner to buy you, forget about it because every other private company that has been funded during the last 5 years is trying to do the same. In addition, I can also promise you that any large or small company looking to buy a startup does not also want to pick up a large burn rate. Even on a private-private merger, most of these VC-backed companies will do nothing unless the deal is cash flow positive on Day 1. Do yourself a favor, build an expense line where getting profitable can happen with the cash that you have. This way you can control your own destiny and also even make yourself a more attractive strategic partner to any company in the future. One other point for all of those advertising related startups-go find some other revenue streams like becoming a platform for partners via cobranding or hosting fees which scale with usage or find some other premium model because the ad market is drying up and the dollars will flow to some of the larger, more established platforms.

]]>http://www.beyondvc.com/2008/10/another-reason-to-watch-your-burn.html/feed2A ray of light in this environment?http://www.beyondvc.com/2008/10/a-ray-of-light-in-this-environment.html
http://www.beyondvc.com/2008/10/a-ray-of-light-in-this-environment.html#commentsWed, 15 Oct 2008 10:47:50 +0000http://localhost/wp_beyond/?p=42I did an interview with Rich Maguire of Datamation last week which he just posted yesterday. While the markets seemed to get excited for a day about the bank bailout, attention is turning toward an even bigger problem for startups, a potential recession. The consumer no longer has that ATM called their house and confidence and spending to boot are down. So what's an entrepreneur to do these days and are there any pockets of opportunity? Trust me, I am not going to give the party line that it is great to start a company now because, you know what, it really is hard to go out and do that. However, if you are brave and bold enough to do so, I will tell you that you could be well positioned 18 months from now when the economy does get back into gear. This market will truly separate out those who are just in it for the money, and those who are out their to build an insanely great product or service. As for the article from yesterday, here is an excerpt and hope you enjoy.

“We know that whether it’s media consumption, content consumption or even enterprise application, that we’re going to be more and more connected. Speeds on wireless devices will get faster, networks will get faster. Devices will get better. They’ll be more and more to do out there.”

Human activity on the Web creates an explosion of consumer data – every nugget of which is worth something to someone. “Data is everywhere,” Sim says. “Every time you turn on your computer, every click you make, everything you do is a piece of data that’s logged somewhere.”

There’s profit in figuring out “How you take that data and turn it into real information, and use it to sell subscription services, target better from a profiling perspective, etc. So I think the data-driven Web is going to be another opportunity.”

His enthusiasm for the Web, however, doesn’t mean he’ll be funding such Web-centric ventures like Facebook-style sites. We don’t need another Facebook, he points out.

“I think the point is that social networking is weaved into the very existence of all the things we do. You see apps getting weaved into your email. People are getting more and more connected out there, and used to that, because of Facebook.”

This saturation will result in consumer behavior being adapted in large businesses. The potential marriage of social networking and the enterprise has piqued investor interest. “How do you take this social networking and information sharing stuff – the clip and blog and share – is there any opportunity to benefit the enterprise? On a content layer? So I’ve looked at some companies along that spectrum as well.”

]]>http://www.beyondvc.com/2008/10/a-ray-of-light-in-this-environment.html/feed1Be prudent but don't panic!http://www.beyondvc.com/2008/10/be-prudent-but.html
http://www.beyondvc.com/2008/10/be-prudent-but.html#commentsThu, 09 Oct 2008 10:01:56 +0000http://localhost/wp_beyond/?p=43The alarm bells are ringing in Silicon Valley and start-up land today with Sequoia Capital and Ron Conway telling companies to prepare for the economic meltdown and to raise cash by cutting their burn. This is not new news as being in New York we started to feel the real economic impact in mid-September as Lehman melted down and as Merrill Lynch was bailed out by Bank of America. This is all prescient advice and something I have been espousing to my portfolio companies for awhile - see my last post from mid-September on Doing More with Less, a mantra that all startups should live by. All that being said, it is not time to hit the panic button. Don't go out and fire everyone wholesale and skinny down just because everyone else is. Do it because it is right for your business and because all of your leading indicators tell you to do so. Do it the right way by not making a 20% cut across the board but by thoughtfully thinking about your business, your priorities, and where you need to focus your capital and resources to grow your revenue but conserve cash.

The good news is that many companies I have seen have learned their lessons from the last bubble bursting and rather than subscribe to the "if you build it they will come" model have turned towards the "release early and release often" model of gaining customer traction sooner rather than later and at much lower costs than before. As I look at the current landscape, obvious areas of concern are any companies with high fixed costs and heavily reliant on direct sales whether it be advertising related or enterprise related. It is clear that for these big ticket sales that many corporations are in the mantra of doing nothing rather than doing something and that startups should adjust their budgets accordingly to reflect this reality. For those companies that live by the frictionless sales model and that are capital efficient with a low fixed cost base, take another hard look at your organization and priorities and haircut unneccessary expenses. Once you do all of that and feel that you have 18+months of runway, look on the positive side as there will be many great people on the market. Yes, cash is king and if you have it and conserve it, there will be some phenomenal opportunities to pick up some great talent.

]]>http://www.beyondvc.com/2008/10/be-prudent-but.html/feed0Delivering on Q3 forecasts!http://www.beyondvc.com/2008/10/delivering-on-q.html
http://www.beyondvc.com/2008/10/delivering-on-q.html#commentsWed, 01 Oct 2008 10:18:16 +0000http://localhost/wp_beyond/?p=44I received some incredible news last night from two portfolio company CEOs updating me on our Q3 numbers. They not only hit their respective forecasts set early in the year, but they beat them. Normally I expect our portfolio companies to hit their numbers, but I am ecstatic because we delivered in the midst of the largest financial crisis we have ever seen. While much news on the technology world is of doom and gloom, and while I too have been advising portfolio companies to conserve cash, it is nice to see that companies are still willing to spend if you deliver a strong value proposition. More importantly these numbers speak to the commitment of the respective teams to do anything possible to deliver on the Q3 forecasts. In each company, sales reps and executives flew out to key prospects and knocked off obstacle upon obstacle until they walked away with an order. Ok, it is not as dramatic as it sounds as there were numerous meetings and technology proof of concepts before getting a sale, but the point remains that the companies that delivered did not wait for the orders but went out and got them. There were a number of stories of sacrifices that were made including one sales rep who was expecting his third child yesterday but was at a prospect getting the contract inked and another one of a sales rep and sales engineer who camped out at a client's office all day and wouldn't leave until they had a signed contract. Extraordinary times require extraordinary measures, and I hope that stories like these inspire you to keep fighting the good fight and to go out and make things happen. Startups need to be scrappy and tough to survive!]]>http://www.beyondvc.com/2008/10/delivering-on-q.html/feed1Doing more with lesshttp://www.beyondvc.com/2008/09/doing-more-with.html
http://www.beyondvc.com/2008/09/doing-more-with.html#commentsMon, 15 Sep 2008 17:56:25 +0000http://localhost/wp_beyond/?p=45Being in New York, it is hard to escape the realities of the ailing financial sector. When I took the train into the city this morning I could see the somber look in people's eyes knowing what had just happened to Lehman Brothers and the uncertainty of the financial markets and economy. Given this state of play, it is clear that capital is becoming scarcer by the minute and that we don't know when we may come out of this mess. The mantra for most businesses is to just wait and see rather than make any real decisions, especially when that requires a commitment of capital. Then I get an email from Bill Morrison at ThinkEquity today outlining his views that we are in Phase II of a Media Recession:

In our experience, media recessions typically develop in three phases. First, marketers reduce spot market activity and eliminate quarterly budget flushes. Then, marketers begin canceling "up-front" commitments and previously signed advertising contracts. Lastly, marketers begin to rationalize/reduce budgets for future years. Our research suggests that we entered phase two of the current media recession during 3Q. Our recent conversations with online publishers revealed a significant number of advertisers that have cancelled contracts or significantly reduced commitments for the second half of 2008. The majority of industry contacts we spoke with this quarter said fundamentals weakened from 2Q to 3Q.

Trust me, I am not a doom and gloom guy and on the contrary believe that now is a great time to invest and build for the future. That being said, it is also time to be smart and highly efficient. It is a great time to look internally and think about your priorities, your processes and whether or not you can do things better.

In this backdrop, I had a couple of board meetings last week and as you might have guessed, one of the recurring themes was needing more resources. While the companies were quite different, I seemed to be in the same meeting with each department head giving an overview and goal tracking from the previous quarter and each presentation ending with, "I need more resources." It's not that I am against hiring more people for portfolio companies, since I am all for it. My only point for all entrepreneurs and managers is that when you put together the hiring plan to make sure you think about the fact that you should always be under resourced and have more things to do than can get done. What this really means is that you have to do an incredible job of prioritizing your goals. Always ask yourself how you can do more with less and you will find that you and your team will become incredibly resourceful and stretch your dollars a lot farther than anticipated.

Speaking from experience, I have repeatedly seen situations where managers ask for additional hires, we tell them to wait a quarter, and then they miraculously are able to manage for the quarter. In fact, I was joking at one meeting the other day saying that it was incredible that we had half the staff from a year ago and have more revenue today that we did before. If we cut in half again, I mused, perhaps we could grow even more. OK-that is quite extreme, and we did agree to end up hiring a few more resources in various departments. What really struck me was the fact that when we hit the wall over a year ago everyone thought we weren't going to be able to make it and grow our business. What changed was that management became maniacally focused in prioritizing opportunities, not chasing every customer, being ruthless about how they spend their time, and consequently reengineering a number of their internal processes. We are now a much healthier company with a better operational platform that merits more investment. While I am not advocating that you starve your business and recognize that every company is different, I am suggesting that doing more with less is a mantra that you should subscribe to regardless of the economic environment and that in the long run it will yield tremendous results for you.

]]>http://www.beyondvc.com/2008/09/doing-more-with.html/feed6M&A – it ain't over till it's overhttp://www.beyondvc.com/2008/08/ma-it-aint-ov.html
http://www.beyondvc.com/2008/08/ma-it-aint-ov.html#commentsFri, 22 Aug 2008 08:21:34 +0000http://localhost/wp_beyond/?p=48The economy is clearly slowing down and the IPO market is nonexistent. As I have always said, this is the time to hunker down and tweak your business to get your model right. If you are interested in exiting today, M&A continues to be the only viable path along that front. Having been through a number of acquisitions and potential acquisitions through the years, one point I must remind you of is that any deal isn't over until its over. On the surface, this seems so obvious. And yes, once a term sheet is signed and a price and general terms are agreed to, you are in great shape. But recently, through discussions with other VCs and entrepreneurs, I am hearing about more situations where strategic buyers may significantly change the deal terms after more serious due diligence or even potentially walk away from a deal. This can be especially painful if you have spent a number of months meeting with the strategic and going through due diligence in lieu of running your business. Trust me, this happened to one of my portfolio companies last year and reasons cited can include we had a change of strategic priorities and or look at the economy, there is no way we can value you like we did when we started the deal.

While I can offer you no protection from this happening to you, all I can say is to be prepared and skeptical, be willing to walk away, and make sure that you both do enough diligence and meet with the right decision makers before you sign any term sheet and embark on the extended process. Once the term sheet is signed, run like hell to get the deal closed because the longer a deal lingers the more opportunity there is for it not to happen. Keep the hammer down and always have next steps and a defined timetable. In addition, to the extent that the strategic acquirer has made other aquisitions in the past, I would try to leverage your personal network to reach out to some of the VCs or entrepreneurs involved to get a flavor for how the strategic will run their due diligence process and what doozies or surprises the strategic throw at you. Before you start spending your money from the acquisition, remember there is a lot that can change and that probably will change so keep that in the back of your mind as you go through the process.

]]>http://www.beyondvc.com/2008/08/ma-it-aint-ov.html/feed2Your reputation matters – how to handle reference callshttp://www.beyondvc.com/2008/06/how-to-handle-r.html
http://www.beyondvc.com/2008/06/how-to-handle-r.html#commentsThu, 05 Jun 2008 09:24:06 +0000http://localhost/wp_beyond/?p=52The world that we live in trades on reputation. What that means is that eventually whether you are raising capital or landing new customers, your references will matter. If you are an entrepreneur, a VC will want to do some deep reference checks on you and also on any major customers or partners. If you are trying to land that big customer, naturally the sales propsect will ask to speak with other customers to get a better understanding of the technology and your service. How you handle and manage these reference calls is crucial to moving to the next step in a funding round or to closing a sale. I have seen some entrepreneurs take the nonchalant approach, feeling quite secure in their relationships, and freely passing on contact information for their personal references and partners/customers. Many times these calls will turn out just fine but there is still a big chance that they might not turn out as planned.

In my opinion, the best way to deal with reference calls is to carefully manage the process. First, I would identify the 4 or 5 best references (customers/partners/personal) and have a call with them to make sure they are willing and have the right attitude and to pre-screen them with questions to make sure they convey the right information to the interested party. Secondly, I would make sure that you don't inundate your references with too many calls as they may tire of helping you after awhile. Finally, I would also set expectations and be quite clear with the VC or potential customer about what to expect from the call. For example, I was talking to a CEO yesterday, and he mentioned that our strategic partner would take a call from a VC but that the partner was not the most effusive individual and would clearly state the facts but nothing more. Well, if that is your only reference for that partner, make sure you convey this to the interested party to set expectations (see my earlier post about that).

As a side note, a couple of my portfolio companies gave pretty big discounts to their first customers but also made sure that as part of the deal they would serve as lead references for other prospective customers and for VCs. The discounts got the customers to take the leap of faith to buy the portfolio companies' products and also got them quite excited to freely promote our technology to others. The point is that you should always think about your reputation, who will be your best reference, and then to cultivate them to really make sure that they can help you grow your business.

]]>http://www.beyondvc.com/2008/06/how-to-handle-r.html/feed6Raising capital and meeting expectationshttp://www.beyondvc.com/2008/05/raising-capital.html
http://www.beyondvc.com/2008/05/raising-capital.html#commentsWed, 28 May 2008 10:27:35 +0000http://localhost/wp_beyond/?p=53What I like to tell portfolio companies is that on average it will take 6 months to raise capital with some cycles being shorter and some being longer. Given that, it is imperative for a company to start thinking about its next round well ahead of time and the milestones it needs to hit to have the right momentum to get potential investors excited. One area that I would like to caution entrepreneurs is being too aggressive on the milestones and revenue forecast, particularly in the near term.

Let me explain. Like any other VC, I love to invest in companies going after big markets with huge revenue potential. That being said, I also like to see plans grounded in reality as well. Rather than get me excited, showing a revenue ramp from $1mm to $17mm to $65mm will actually do the opposite for me, raising more questions and concerns than general excitement. Along those lines, it is also imperative that when you share your plans with investors that you are pretty confident that you will realize your milestones or hit your numbers in the next 6 months as investors like to see if you can deliver on your promises. One cardinal sin is being overly optimistic in the near term and falling flat on your face in the due diligence process. It is much better to position yourself in a way that you can meet and exceed expectations during the due diligence process than the other way around. When this happens the rest of your forecasts become more believable.

]]>http://www.beyondvc.com/2008/05/raising-capital.html/feed5Developing your way to success or failure…http://www.beyondvc.com/2008/04/developing-your.html
http://www.beyondvc.com/2008/04/developing-your.html#commentsWed, 09 Apr 2008 13:25:53 +0000http://localhost/wp_beyond/?p=58During the last month, I have been in board meetings and thinking to myself about what was going well and what wasn't. And when the discussion came to revenue, one common theme that always seemed to surface was a focus on the next product. What I mean is that when discussing why our current product wasn't selling as well as it should have or getting as many users as projected, the answer was always focused on the next product or feature. Granted, I have always believed that one needs an insanely great product or service to generate sustainable revenue and that constant iteration is key to success. However, it is also important to understand why a current product or service is or isn't doing as well as you thought. In addition, entrepreneurs must also think about how they are going to get the product to the market and come up with the right messaging. I have seen a number of situations where entrepreneurs can get too focused about developing and releasing the next product or feature without spending as much or even more time and resources in getting it out to the market. Then when management and the board sit down to evaluate what went wrong, the answer seems to be that people clearly didn't care. That can be a huge failing because the product or service may actually be phenomenal but just may have had no marketing or support in reaching potential customers.

So my advice is that before you place all of your bets on the next product or feature, make sure you put enough effort into crafting the right message and value proposition and that you put just as many resources into getting it out to the market. In other words, give your product a chance to succeed and don't starve it to death. Constantly developing new technology without having a well-thought out plan to get it to market can spell doom! Developing your way to success can work only if you realize that it is only part of the battle.

]]>http://www.beyondvc.com/2008/04/developing-your.html/feed4Direct ad sales and startupshttp://www.beyondvc.com/2008/03/direct-ad-sales.html
http://www.beyondvc.com/2008/03/direct-ad-sales.html#commentsSat, 29 Mar 2008 08:29:18 +0000http://localhost/wp_beyond/?p=60I have recently met a number of startups with interesting consumer applications or services. As expected, many of these startups have a vision to rely on advertising to pay the bills. And like many startups, a number of these companies have plans to add a direct ad sales staff over time. That makes a ton of sense, but what I believe is that many entrepreneurs underestimate the direct capital and management costs necessary to build such a team. In many ways, building a direct ad sales team is similar to building an enterprise sales team. These thoughts may seem quite basic to you but here they are nevertheless. First, don't ramp up your sales team too quickly until you have a product to sell. That means if you don't have scale or enough eyeballs you are better off using Google Adsense. If you don't heed this advice you may quickly burn yourself out of business. Secondly, I know that many startups may not know what kind of ad units to sell but be careful of not having a standard product list or rate sheet when you go out to the market. Yes, I know you have to be creative if you have a new service and listen to your customers, but at the same time don't base your business on selling one-off ad units for each advertiser because this can be a huge drain on your technical resources over time. Next, make sure you never forget that what is right for your users is right for your business. Many times I have seen companies that are trying to meet the advertiser's inventory requirement make the ads much too prominent and sacrifice usability in the long run. While this may drive some initial short-term results, it may come to bite you in the ass in the future.

The bottom line is that Google Adsense works well for a reason-it has scale-it has tons of eyeballs, it has a huge customer list of advertisers, and is therefore more likely to get you great pricing and ad targeting. Yes, I don't disagree that over time you want your own sales team and don't want to solely rely on one partner for your revenue, but just go into this with your eyes wide open and don't ramp up before its time. The direct costs, management costs, and hidden strains on your infrastructure may be more than you can handle if you ramp up too quickly. Start slowly, figure out what it is that advertisers love about your service or product, figure out what kind of units deliver the best results, and then ramp. Here is an earlier post on ramping up an enterprise sales team as there are many similarities to direct ad sales and direct enterprise sales.

]]>http://www.beyondvc.com/2008/03/direct-ad-sales.html/feed9The economic headwinds are getting stongerhttp://www.beyondvc.com/2008/03/the-economic-he.html
http://www.beyondvc.com/2008/03/the-economic-he.html#commentsWed, 19 Mar 2008 11:54:17 +0000http://localhost/wp_beyond/?p=64I was waiting for this day to happen. Each day I go online and also glance at the newspaper, and there is nothing but bad news. And yes, it is true that some of the best technology companies were built when the economy was at its worst. And I always like to think that it takes a little longer for some of these negative effects to trickle down to smaller companies and startups. Just the other day, I got the call from one of my portfolio companies which had won a huge deal last month. We were waiting for the purchase order and the dreaded call came: "You still have the deal but our CFO needs us to cost justify every dollar we spend on IT - the deal will have to wait until next quarter." That definitely put a kink in our plans and also caused us to adjust our Q1 forecast. Fortunately, many of us had been through this before and management had prepared alternative plans based on various growth rates at our last board meeting. We had a base case model which we were running our expenses on, an upside model which we had hoped we would achieve, and a lower growth scenario which we would have to implement if bookings did not materialize. I know that this is one data point but all I can say is that if you have not done so already, prepare a few different models to make sure you can make appropriate changes to your business to conserve cash. I won't say that we are in a recession but if we get more data points on spending freezes, layoffs, and the like, it is only prudent to be prepared. And yes, as I stated above, while some of the best technology companies were built when the economy was at its worst, they would not be here today if they weren't standing when the markets rebounded. That means that you have to rationalize your business and put more resources behind what is working and not spread yourself too thin. That means if you are raising another round of funding try to raise more capital rather than less - focus on having about 18 months of fresh dollars to see through the other side. Finally, stay strong and keep your head up because if you follow the above advice you will have a much stronger business when the markets rebound.]]>http://www.beyondvc.com/2008/03/the-economic-he.html/feed0The "free" business modelhttp://www.beyondvc.com/2008/02/the-free-busine.html
http://www.beyondvc.com/2008/02/the-free-busine.html#commentsMon, 25 Feb 2008 09:36:47 +0000http://localhost/wp_beyond/?p=66Chris Anderson does a nice job of summarizing the rise of the "free" business model starting with the Razor/razor blade to the world of the web where he argues that all services eventually get priced at their marginal cost. And as Chris rightly describes, that price is quickly going to zero in a world of technology where Moore's Law continues to hold and where storage costs are declining rapidly.

Among the many great examples in Chris' article, the one paragraph that stood out most for me follows:

There is, presumably, a limited supply of reputation and attention in the world at any point in time. These are the new scarcities — and the world of free exists mostly to acquire these valuable assets for the sake of a business model to be identified later. Free shifts the economy from a focus on only that which can be quantified in dollars and cents to a more realistic accounting of all the things we truly value today.

In a world where everything is free, what is the most valuable asset? I couldn't agree more that "attention" and "time" are two scarcities that every company offering "free" services has to overcome. There is only so much time in the day for all of us to join another social network, add a new widget, and try out a new web service. And this fight is not only for a consumer's web time but for their overall leisure time - time to spend with their family, time for sports, and time for entertainment. Given this competition for such a finite resource, you better have something incredible for me to try which will either provide awesome entertainment or provide an awesome utility that gives me a 10x improvement over existing ways of doing things. Without that, I am sure you will get people to sign up and try your service, but I doubt you will have many active users 6-12 months down the line.

And my final point is that "free" is great and what consumers expect many times, but at some point in time dollars do have to come from somewhere whether it be venture capitalists (who will surely expect a big return on their investment), advertisers who will expect the same, or some other source of capital to sustain the business. So in concept I agree with the notion that the world is getting cheaper by the second, but on the other hand don't forget Chris' points that free only means that dollars do eventually have to come from somewhere to pay the bills. Oh yeah, one other point-as we move to this world of free, there will be lots of carnage and the road will be littered with many dead companies, as only a small percentage in a growing pie will be able to make this model work and viably consume your time and attention to deliver the money.

]]>http://www.beyondvc.com/2008/02/the-free-busine.html/feed1Top tech M&A advisors for 2007http://www.beyondvc.com/2008/02/top-tech-ma-adv.html
http://www.beyondvc.com/2008/02/top-tech-ma-adv.html#commentsFri, 08 Feb 2008 09:41:37 +0000http://localhost/wp_beyond/?p=67I just got the 451 Group's summary on the top M&A bankers for 2007. As with 2006, Goldman Sachs was #1 on the list. Take a look:

Top five overall advisers, 2007

Adviser

Deal value

Deal volume

2006 ranking

Goldman Sachs

$79bn

43

1

Credit Suisse

$75bn

29

3

Morgan Stanley

$74bn

29

6

Citigroup

$61bn

23

5

Lehman Brothers

$56bn

21

4

Of course if you break down the numbers, you can see that the average deal size for all of these banks range from $1.75 to 2.75 billion. Let me translate back for the startup community. As I have written before, I am a firm believer that companies are bought, and not sold (see an earlier post). In other words, I am not a fan of hiring a banker to shop a company around but rather find it better when a portfolio company receives an unsolicited offer and you then bring a banker in to leverage that bid to create a more competitive situation. Assuming you are in this position, every startup I know says, "Let's go get Goldman or Morgan Stanley." While in theory we would all love to have these guys as advisors, the chances are that you are not going to get them on board. First, they typically have high minimum thresholds of exit value typically in the $300mm plus range and secondly even if you fit that criteria you may not get all of the attention you need since a $5 or $10 billion dollar will clearly trump yours. What I would advise is that you find a banker that has the recent experience selling companies in a price range that you are seeking, will give you the PERSONAL attention that you need to make the transaction successful, and has the network to reach out to the right people on a timely basis. Based on my experience, I have found that some of the firms like Thomas Weisel Partners and Jefferies Broadview who are not bulge bracket but with strong reputations in the technology markets can be a good fit. I am sure there are many other great firms that I am missing but you get the idea.

]]>http://www.beyondvc.com/2008/02/top-tech-ma-adv.html/feed1What a Microsoft Yahoo deal would mean for startups (continued)http://www.beyondvc.com/2008/02/what-a-microsof.html
http://www.beyondvc.com/2008/02/what-a-microsof.html#commentsFri, 01 Feb 2008 14:02:15 +0000http://localhost/wp_beyond/?p=68What a great move by Microsoft! This has been floating around for awhile and the last time I wrote about it was in May of 2007. Anyway, I thought I bought at the bottom for Yahoo months ago in which case it fell another 25% from there. When I saw the news this morning I was quite happy to sell my shares and make a slight profit. As we all know when it comes to the Internet and advertising, scale matters. What this potential deal could mean for startups are two things. One, when Microsoft finally integrates its 3 or more advertising platforms with Aquantive, adcenter, and Panama, they may just be able to offer startups a decent or even better alternative to using Google Adsense to monetize their inventory. Secondly, that huge collective sigh you are hearing is one that is based on the fact that there will be one less independent multi-billion dollar acquirer for the thousands of startups out there. In fact, this integration could take awhile and take Microsoft out of the running in the near term as well. So if you are a startup depending on a quick flip, I would do what you were always supposed to do - focus on your fundamentals and figure out how to build a real business. In addition, given the uncertain economy, I would be very careful on ramping up your business too quickly unless you have the results to justify your growth in fixed costs. Moving on, it will truly be interesting to see how Microsoft integrates Yahoo and what parts of Yahoo it decides to sell like Kelkoo or kill like possibly Zimbra. All I know is that there have been lots of senior Yahoo resumes on the street so it will be interesting to see where they all end up.]]>http://www.beyondvc.com/2008/02/what-a-microsof.html/feed1Greenplum closes on $27million round of financinghttp://www.beyondvc.com/2008/01/greenplum-close.html
http://www.beyondvc.com/2008/01/greenplum-close.html#commentsTue, 22 Jan 2008 11:11:22 +0000http://localhost/wp_beyond/?p=71Congratulations to Bill, Scott and team on our new $27mm round of funding led by Meritech and including Sun Microsystems and SAP Ventures. You guys have been pushing the envelope since I have known you and delivering some spectacular results to boot. It is nice to see our team and product get validated with a significant round of funding so we can continue our battle to bring our customers a better, faster, and cheaper way to access and analyze massive volumes of data. When we made our first investment years ago, our fundamental bet was that a new approach was needed to deal with exponential data growth driven by network computing and internet applications. We certainly had some fits and starts tackling this data problem by utilizing a software-only approach built on top of open source software and delivered on commodity machines, but with this funding and our continued customer momentum, we are certainly on the right track. For more on this investment, read the following quotes from Jonathan Schwartz, CEO of Sun Microsystems, and Nina Markovic, head of SAP Ventures:

"Alongside Sun's acquisition of MySQL, our investment in Greenplum is further evidence of our commitment to the open source database community and marketplace," said Jonathan Schwartz, CEO and president, Sun Microsystems. "Postgres has been a critical part of our support offering to customers, and Greenplum's leverage of Postgres to disrupt the proprietary vendors with breakthrough business intelligence solutions creates opportunity for their investors, and more importantly, our mutual customers."

"We invested in Greenplum because we're seeing a growing demand for scalable database technologies to support analytical and data-driven applications," said Nino Marakovic, head of SAP Ventures. "From a technology perspective, the Greenplum database is very strong and complementary to our offerings. We share the vision of enterprises harnessing ever-growing data repositories to make optimal business decisions in real time."

]]>http://www.beyondvc.com/2008/01/greenplum-close.html/feed0Show me the love and I'll show you the moneyhttp://www.beyondvc.com/2008/01/show-me-the-lov.html
http://www.beyondvc.com/2008/01/show-me-the-lov.html#commentsThu, 17 Jan 2008 09:12:58 +0000http://localhost/wp_beyond/?p=72I got a call before the holidays from a prospective customer that I introduced to one of my portfolio companies. He said he loved our product, saw it fitting in perfectly into their platform, but that we were not responsive enough to their needs. I was able to get a second chance for our team but since deals are momentum-based, I knew that it would be an uphill struggle to win. While our technology was the best, his guys told him that they were quite concerned about our ability to be there when the shit hit the fan. In other words, they wanted to make sure that no matter what happened that they could rely on us to be there on a moment's notice to support them and help fix any issues. As I have mentioned in a previous post, you only get one chance to make a first impression and if you are strapped too thin or chasing too many deals at once, it may come back to haunt you. You see, many companies that try to partner or sell into enterprises forget that showing the love early in the sales process and stressing the support factor is as big a deal as the technology itself. I am not saying that if your technology sucks and you are there 24/7 you will win, but what I am saying is that if your technology is on the margin and all things being equal, your ability to support that partner or customer will be a huge deciding factor. So if you want the customer to show you the money, make sure that you show the love pre- and post sale. ]]>http://www.beyondvc.com/2008/01/show-me-the-lov.html/feed3Google giveth…and Google taketh away…http://www.beyondvc.com/2008/01/google-givethan.html
http://www.beyondvc.com/2008/01/google-givethan.html#commentsWed, 16 Jan 2008 10:13:18 +0000http://localhost/wp_beyond/?p=74Here is another example of one of my portfolio companies' mantras: Google giveth and Google taketh away (see my post from April for more on this). Who knows the real reason why Google shut off Adsense for Incredimail (Nasdaq: MAIL) but look at what happened to the stock in one day---a 40% drop. I am not saying that startups should not use Adsense but this just reminds that one should always take a hard look at their business and if they are too heavily dependent on any one customer or partner, they should think long and hard about how to diversify their business. Any good company will ride the gravy train as long as they can while preparing themselves for the day the ride will be over. As I have said before, there is nothing wrong with free distribution or easy revenue but at some point in time, startups need to figure out how to control their own destiny.

And while we would all love to build our business off the back's of other brands and distribution, at the end of the day, in order to create a big winner, it is imperative for startups to control their own destiny. This means that your business has to be able to grow organically and not have its fate FULLY dependent on its partners.

]]>http://www.beyondvc.com/2008/01/google-givethan.html/feed0Newsgator – going about enterprise sales the right wayhttp://www.beyondvc.com/2008/01/newsgator-goi.html
http://www.beyondvc.com/2008/01/newsgator-goi.html#commentsThu, 10 Jan 2008 07:02:39 +0000http://localhost/wp_beyond/?p=75I was catching up on my feed reader this morning and noticed my friend Jeff Nolan's post (also see Brad Feld) on Newsgator and FeedDemon RSS clients now being free. I know that Jeff joined Newsgator because of his belief in the enterprise, and I applaud the company's new strategy. As I have written before, enterprise sales is incredibly hard. If I were going to do anything on the enterprise side, I would look at how to make my sales as frictionless as possible. Leverage SAAS and downloads and reduce the barriers to usage. What you have in a free Newsgator and FeedDemon RSS client is the opportunity for the pull-push method of enterprise selling vs. the push-pull method. Rather than only rely on expensive enterprise sales guys trying to push products into corporations, Newsgator, as Jeff says in his blog post, has the opportunity to expand its client base from 1mm users to 10mm users and have them potentially pull Newsgator into new enterprise sales opportunities. This is certainly a new way of thinking and considering that the company has an excellent client, this should be a winning strategy. From Jeff's post:

So if we are generating zero dollars of revenue from the client applications that we used to sell, well what is our business? Today we generate the bulk of our revenue from enterprise software, which is predominately server products but also includes these client applications (we call them “endpoints”). The fact remains that we actually generate a significant number of enterprise leads from people who are using our client apps and then realize they would benefit from enterprise management products. By that logic, more client applications in use is more enterprise goodness for us.

]]>http://www.beyondvc.com/2008/01/newsgator-goi.html/feed2The KISS Method and innovationhttp://www.beyondvc.com/2008/01/innovation-as-a.html
http://www.beyondvc.com/2008/01/innovation-as-a.html#commentsWed, 09 Jan 2008 17:03:40 +0000http://localhost/wp_beyond/?p=76 I had a great conversation wtih a friend of mine yesterday about the latest release of his product. He had mentioned that one of my clips from the Economist (see below) on Evan Williams from Blogger and Twitter fame spurred some lively debate at his company. The key thought from Evan is rather than worry about adding another feature or function, ask yourself what can be taken away to create something new." This is a central idea and one that reminds of me the KISS method of writing that my high school english teacher taught me. When in doubt about your work revert to the KISS method - KEEP IT SIMPLE STUPID. Too often we drink our own Kool-Aid and don't ask ourselves the tough questions about ourselves or our product. We also believe that having another bell or whistle on our product will be the next big thing rather than asking ourself the opposite question-will it really be the next big thing if we have less to offer than more? As you know from my other posts, if you are developing any product or service keeping it incredibly easy to use is a surefire way to success.

Keep reading this clip and article for more on Evan's thoughts - focusing on simplicity and radical constraints

The irony of trying to plan accidents, and orchestrate their frequent occurrence, is not lost on Mr Williams. So he tries mental tricks. One is to ask “what can we take away to create something new?” A decade ago, you could have started with Yahoo! and taken away all the clutter around the search box to get Google. When he took Blogger and took away everything except one 140-character line, he had Twitter. Radical constraints, he believes, can lead to breakthroughs in simplicity and entirely new things.

]]>http://www.beyondvc.com/2008/01/innovation-as-a.html/feed3Changing leadership is never easyhttp://www.beyondvc.com/2008/01/changing-leader.html
http://www.beyondvc.com/2008/01/changing-leader.html#commentsTue, 01 Jan 2008 08:47:38 +0000http://localhost/wp_beyond/?p=78 I have been a Ravens fan for quite awhile, and I am glad they finally made this move. Being an avid sports fan and former DI lacrosse player, I have always tried to take lessons from the sports world into the business world. This is yet another example that reminds me of working with startups. At the end, Coach Billick lost control of his team as they lost faith in his strategy and execution. Sounds like you could replace the name of Coach Billick with startup CEO.

it is never easy whether it be in business or sports but the comment that stands out most for me is that bringing in an Offensive Coordinator for Coach Billick would have been a band-aid. Companies and teams don't need band-aids-they need to make the tough decisions. So if you think your company needs a COO, think deeply about whether or not that is what you need or if you really need a new CEO

Billick's personality and message had gotten stale, and his lack of discipline contributed to the problems this season.

Before yesterday, the Ravens and Billick had agreed to bring in a new offensive coordinator for the 2008 season, but that would have been a Band-Aid.

It's hard to justify having two highly paid coordinators running your team. That would have been another indictment of Billick. What was Billick supposed to do? Go to the first 20 minutes of practice and then take a nap?

Billick was on his way to becoming a figurehead, a once-powerful coach who kept losing more control every year since 2005, when Bisciotti publicly reprimanded him.

Billick was working in reverse. Over extended periods of time, great coaches such as Bill Walsh and Bill Parcells gain more power and become general managers and presidents as well as coaches. But Billick's power base was eroding.

]]>http://www.beyondvc.com/2008/01/changing-leader.html/feed4Don't forget the long termhttp://www.beyondvc.com/2007/12/dont-forget-t-1.html
http://www.beyondvc.com/2007/12/dont-forget-t-1.html#commentsWed, 12 Dec 2007 13:00:33 +0000http://localhost/wp_beyond/?p=79Tis the holiday season and with the end of year comes budget planning for 2008. So that means it is time to get all of your key management members together to start reviewing 2007, what worked well, what did not work out, and to hammer out goals for next year. In the spirit of giving, I thought I would share with you one piece of advice - don't sacrifice the long term value of your business for the short term. What it comes down to is how you allocate your dollars in your budget. Every dollar you spend in one functional area is a dollar taken away from another department. If you spend too much on sales today, you may not have enough in R&D and vice versa. It is careful when budgeting to think about 2008 but also to plant the seeds for 2009 as well.

Let me give you a few examples from recent meetings with portfolio companies or friends seeking advice. I was recently reviewing a 2008 budget and was quite excited about the bookings and revenue ramp that the management team had presented. However, as I dug into the model the one point I recognized was that it was all driven by additional sales headcount. That is ok, but what I did not see was any investment in building out our channel or OEM business. Granted, the management had to finely balance their cash spending with their revenue forecast, but my concern was that if we did not invest today to build for the future 12 months out, we would not have any sales leverage in our business. After discussion, we were in favor of sacrificing some near term revenue in order to get the key headcount to start building the channel and partnership model. Yes, these opportunities always take time to build, but if done right can help fuel rapid sales growth 12-18 months down the line. Without any upfront investment, the company was stuck with a 1:1 sales model meaning that bookings and revenue were directly correlated to each additional headcount.

Another example came from a breakfast meeting I had today. I was catching up with an entrepreneur I have known for awhile and getting an update on his business. We were discussing the various product lines at the company, and how each line was respectively performing. What was clear was that the market the company initially set out to conquer had become commoditized, and that his business did not diversify quickly enough to offset this trend. In other words, he said that while the company was doing well, his biggest regret was not investing enough in the future. Even though they saw their core market slowly dying, they milked the cash cow as much as they could but did not do enough to build new product lines. It was a classic case of "the exit is around the corner" where the management and board focused too much on prettying up the revenue growth and profitability lines at the expense of positioning the company solidly for the future. When the exits didn't materialize, the team had to go back to the drawing board and start building out a new product line. If they had done that 2 years ago, they may have sacrificed some revenue but they would also be better positioned today.

So the lesson is both cases is to carefully balance your revenue goals with making the right level of investment for the future whether it be in diversifying your go-to-market strategy or building out a new product line. Yes, we live in a short-term world where every investor is focused on the next month or quarter, but it is imperative for any technology company to balance today's needs with the future opportunity. I hope these examples spur some vibrant discussion amongst your management team as you put together your goals for 2008 while keeping an eye out for 2009.

]]>http://www.beyondvc.com/2007/12/dont-forget-t-1.html/feed3It's hard to sell scalabilityhttp://www.beyondvc.com/2007/12/its-hard-to-sel.html
http://www.beyondvc.com/2007/12/its-hard-to-sel.html#commentsMon, 03 Dec 2007 18:31:28 +0000http://localhost/wp_beyond/?p=80I have written many recent posts on Internet and web-based models, but I still do spend a good portion of my time with companies selling in the enterprise. After a series of meetings over the last few days with startups and some of my portfolio companies, I wanted to highlight one important fact - it is hard to sell scalability. In addition, it is important to highlight that you only have one chance to make a first impression. So what the hell does all of this mean ?

Every interaction with your sales prospect or customer is a chance to impress. What that means is if your user interface is weak or if your product is hard to install or if during a POC process it takes you 3 days to get set up while it takes a few hours for your competitor, you have most likely lost the sale. If your product is hard to use or set up, then how is the customer going to believe that your product is more scalable? So take a word of advice, the companies that tend to do well are the ones that have nailed down the first impression - strong and clear value propostiion, great UI, and easy to use and install. Leading with scalability is a losing proposition. If someone offered you the opportunity to buy a Ferrari or a Ford Pinto at a similar price, I am sure most people would opt for the Ferrari. If I told you later on that the Ferrari had a Ford Pinto engine and the Ford Pinto had a Ferrari engine, I would imagine that most would still go for the looks and the Ferrari. For many buyers in the IT space, first impressions mean a lot and once a sales prospect falls in love with the Ferrari, it will be hard to keep pounding the table saying that your Ford Pinto will outperform the Ferrari by an order of magnitude. Many times by then you have probably lost the sale. I am not saying that scalability doesn't matter because it does. Every customer expects you to scale and every competitor will say they scale. My only point is that if you can scale like no tomorrow but what the customer sees and touches is subpar, you are going to have a hard time generating sales.

One final point-having awesome sales engineers is key to success for any company selling in the enterprise. These positions are hard to fill as you are typically looking for someone who is not only technically savvy but also strong in sales as well. Great SEs help you close sales, make the sales prospect feel comfortable, work out the initial kinks in your technology, and provide great product feedback for your roadmap.

UPDATE: I got a few emails from readers who thought that I meant scale doesn't matter. It does, just not as the lead-in for why your product is better than your competitor. It is hard to see, touch, or feel scale in a sales meeting and what you are left to do is make sure that every sales prospect engages with you in a proof of concept so you can demonstrate scale. And yes, if you can't install it easily and if the customer can't use it easily, then scale does not matter. You have to show them how your product solves their problem and why it is easy to use. Sometimes engineers can spend too much time on having the fastest engine and not enough time on designing a beautiful body. Scale matters but not as your main selling point.

]]>http://www.beyondvc.com/2007/12/its-hard-to-sel.html/feed2NYC 2.0 (continued)http://www.beyondvc.com/2007/10/nyc-20-continue.html
http://www.beyondvc.com/2007/10/nyc-20-continue.html#commentsThu, 18 Oct 2007 21:57:02 +0000http://localhost/wp_beyond/?p=84I never made it to the Web 2.0 conference yesterday, and you know how I feel about that label :-). Anyway, I happened to be in San Francisco for a portfolio company board meeting and some other events. After a Nokia boat cruise with many of the team that launched the awesome Nokia Internet 810 tablet (I will get myself one of those), I had the opportunity to go to a MySpace party to celebrate the opening of their San Francisco office. I had a great time and while I ran into many friends from the Bay Area, what I enjoyed most was bumping into many of the original New York entrepreneurs that I have known over the last 10 years. In a scary way, it felt like it was 1997 all over again, and we were at a networking event in New York talking about their first startups. The only difference is that it is 10 years later, and we have greyer hair. Jeff Stewart who was part of the Proxicom rollup and founded Mimeo and now Monitor110, said that everywhere he turned he ran into another New York entrepreneur. Standing next to me was Andrew Erlichson founder of Flashbase (sold to Doubleclick) who I funded years ago and now CEO of Phanfare, across the room was Andrew Weinreich of sixdegrees and now meetmoi, and on the other side of the room was Jason Calacanis of the Silicon Alley Reporter and Weblogs and now Mahalo. While he is in LA now, I still count him as an original New York entrepreneur. Jeff and i tried to organize a group picture but just could not make it happen.

You may be thinking to yourself who cares or why is Ed namedropping? There is a simple answer - I have known many of these guys for the last dozen or so years since the first Internet wave, and it is simply awesome to see everyone still plugging away, following their passions, getting smarter and better, and continuing to build the New York entrepreneurial ecosystem. I know we are no Silicon Valley, but it is great to see these entrepreneurs all working on their second and third companies. It was also great to hear their stories of raising their first or second or third rounds of capital for their most recent companies. When I started as a VC in 1996 and first met many of these entrepreneurs, it was clear that we were all starting from scratch. We didn't know what we didn't know. We didn't have entrepreneurs working on their second and third startups back then. What we had was energy and passion. And yes I agree that the whole Silicon Alley movement was pure hype and ridiculous but for those of us who have stuck around we have learned a lot and we are on the cusp of doing some great things. We now have energy, passion, and grey hair which is a great combination. I said it before in my NYC 2.0 pitch a couple years ago, but I believe that everyday our world here is getting more and more important as the media companies and advertisers try to make sense of this new era of communications. As companies like Google and AOL and others continue to build a bigger and stronger presence here, it will continue to make us better. True to form, I have already seen my first couple of spinouts from the Google New York office, and I expect to see many more. But it is many of these guys that I hung out with above who were some of the original pioneers in New York that have helped blaze a path for many of the new entrepreneurs we are seeing today. When the bubble popped, they didn't quit and go home. They continued to fight and continued to build new companies and for that we should all be thankful because today the New York ecosystem is building and getting stronger. The funny part is that it took me being 3000 miles from home to have this revelation again.

]]>http://www.beyondvc.com/2007/10/nyc-20-continue.html/feed2Are there enough ad dollars for the thousands of small startups?http://www.beyondvc.com/2007/10/are-there-enoug.html
http://www.beyondvc.com/2007/10/are-there-enoug.html#commentsSat, 13 Oct 2007 10:43:41 +0000http://localhost/wp_beyond/?p=85as i have said before the big keep getting bigger and the low barriers to entry mean more and more small guys are fighting for crumbs. the only way to sustain is if dollars continue to flow from old media to new media and the pie continues to get larger. if it does not, watch out!

The catch, according to some, is that much of the money flowing toward the Internet is concentrated on a few dozen of the most popular sites. That has left smaller, less well-known sites at a severe disadvantage when it comes to attracting advertising money and surviving.

In the United States, the top 50 Web sites accounted for more than 90 percent of the revenue from online ads in the first half of 2007, according to the Interactive Advertising Bureau and PricewaterhouseCoopers. The top 10 sites accounted for 70 percent of the revenue.

]]>http://www.beyondvc.com/2007/10/are-there-enoug.html/feed4Should I flip or should I build?http://www.beyondvc.com/2007/10/should-i-flip-o.html
http://www.beyondvc.com/2007/10/should-i-flip-o.html#commentsThu, 11 Oct 2007 14:51:44 +0000http://localhost/wp_beyond/?p=86It seems that everyday there is a new annoucement of a tiny startup being bought by a large company. Two days ago it was Jaiku being bought by Google and this morning CBS announced that it is buying Dotspotter, a 10 month old gossip blog. Put yourself in these entrepreneurs' shoes - you launch a great product or service today, usage is growing, revenue is nil or minimal, and cocktail party chatter and buzz are at its highest. You then have the opportunity to sell today at a pretty good number but you forego your chance of building that huge business. What do you do and how should you think about it? As i started thinking deeper about this question, I was reminded of the old Gartner Hype Cycle chart. If we use this as a backdrop, perhaps I could show a framework from which to think about this important decison.

According to Gartner, "A Hype Cycle is a graphical representation of the maturity, adoption and business application of specific technologies." Similarly, I have graphically represented the choices an entrepreneur has to make in the continuing saga of build or flip. Let's call this the "BeyondVC Startup Cycle." According to Gartner, there are 5 phases in a Hype Cycle (my comments in parentheses): Technology Trigger (product launch), Peak of Inflated Expectations (height of buzz), Trough of Disillusionment (this is harder than I thought), Slope of Enlightenment (the broad market is finally ready), and Plateau of Productivity (better have my next product ready). I believe the descriptions speak for themselves as what usually happens with the adoption of new technology is that the hype builds quickly but it actually takes a lot longer to reach critical mass. Similarly, one can superimpose a startup lifecycle on the graph. If you look at the build or flip question in this context, it is obvious that an easier, less risky choice to make is best done at the Peak of Inflated Expectations or height of the cocktail circuit chatter. Usually at this point in time, an entrepreneur can maximize short-term value as acquirers will buy more on vision and technology than on business fundamentals. If you decide to build for the long haul and go for the home run, it will take you a fair amount of effort and time to create the same value that acquirers will pay today at the buzz cycle as they will expect more mature companies to have more established products or services and more milestones hit. Companies that sell at the early stages should understand that while they may forego going big, if they do not sell today for strategic value then they would have to live up to their hype and be bought in the future for real revenue. In other words, as companies mature the valuation of a startup turns from pure strategic value to one where it is based more on actual revenue multiples and market comparable data.

At this inflection point, an entrepreneur needs to think about whether they want to and can build for the long haul (taking into account the risk and time to do so) or sell today (net present value of your potential expected outcomes in the future). This is the point where you have built a nice service or product, gotten a number of users, but have not really monetized it or created a scalable business model that can drive profits. Can you really build a company or is this just a feature for a bigger player? If you choose to go for it and raise VC funding, you have to really believe that the capital you raise will help you create a much larger pie in the end. Do you want a larger percentage of a smaller pie or a smaller percentage of a much larger one? Once you take in the money, it requires a ton of hard work to build a team, continue to innovate, and refine your business model. There are no guarantees and given the amount of time and energy you expend you could just as easily go out of business after 5 years of effort. One other factor for entrepreneurs to look at is the opportunity cost or the time you spend on one venture.

Since I never like to make decisions in a vacuum, if I had an offer, I would test the market to get a read from VCs to see what their interest level is in funding my business and also poke around and speak to a couple of other strategics to see if I could extract more value. In the end, these valuable data points will help you make a more confident decision - if no VCs bite, then it is an easy decision for you. If some VCs have an interest, try to understand how much capital and at what price they would be willing to invest. If you really believe in your business then you should either take the money from the VC or get a significant premium from the strategic investor to sell today versus building your business for the longer term.

At the end of the day, it comes down to two things. First, what is your appetite for calculated risk - in finance there is a direct correlation to risk and reward. If you want the big payday, you are not going to get it investing in risk-free bonds. Secondly, it comes down to your passion. Building a company is about more than just the money as money can be fleeting - remember the bubble, it sent a lot of carpetbaggers home. The ones who have made the big payday have focused on a broader and bigger goal, building an insanely great product or service for their customers and keeping them incredibly happy. As you do the right thing for your customers, you will do right for your investors, your employees, and ultimately yourself.

]]>http://www.beyondvc.com/2007/10/should-i-flip-o.html/feed6On performance based earnoutshttp://www.beyondvc.com/2007/10/on-performance.html
http://www.beyondvc.com/2007/10/on-performance.html#commentsMon, 01 Oct 2007 13:47:57 +0000http://localhost/wp_beyond/?p=87I am sure you remember the ebay-Skype deal where ebay coughed up $2.6b upfront for Skype and offered an earnout of up to another $1.7b for hitting performance numbers. Besides the value of the deal, what struck me most was that 40% of the total potential deal size was based on performance-based milestones. Fast forward 2 years later and in the day of reckoning it seems that eBay is only going to pay $530mm of the $1.7bb earnout (see Eric Savitz from Barrons post and press release). I am not going to comment here on whether or not the Skype deal was a complete failure for eBay, but rather I thought I would more importantly share my thoughts on earnouts in M&A transactions.

Quite simply, be wary of performance based earnouts unless you get significant value upfront. Many times an acquiring company may say that they can't pay higher than a certain value for your business but if you perform they can pay alot more. In other words, they want you to put your skin on the line and also incent you to stick around. That is fine as long as you get more than enough upfront for your business so that any dollar from earnouts is just pure upside. If you feel that you are not selling for enough and that too much is tied in the earnout, then trust your gut and either rework the deal or walk away.

Earnouts in theory sound great - the better you perform the more you get. However in practice it doesn't always work out well. First, earnouts could potentially put the acquiring and target company at odds by creating potential perverse incentives for the acquiring company. Hmm, the company I just bought is doing great but I don't really want them to hit it out of the park just yet so I may delay giving them their marketing dollars? You can obviously think of a bunch more examples on this front. More importantly, though, I feel that unlike a startup, you have relatively little control of your own destiny. In any M&A with performance numbers, the acquiring company will say it is offering all of these resources and distribution and therefore the revenue, profit, and customer targets should be quite high yet attainable. In a startup, if you fail it is your fault. As part of an operating business or larger entity that isn't always the case as you are most likely dependent on the acquiring company for resources, distribution, and cash to grow and deliver on your promises. Big companies move slow and you are more likely to not get the support you need in a timely manner meaning that realizing your earnout becomes a very tough proposition. Even thinking about the ebay-Skype saga, I can remember reading the countless news items and stories about how the 2 cultures clashed, how ebay did not understand the Skype business, and the management changes and reorgs that took place. All that being said, I am sure the investors are bummed about leaving another $1.2b on the table in earnouts but at the same time they are still ecstatic about the initial $2.6b they received upfront.

]]>http://www.beyondvc.com/2007/10/on-performance.html/feed7Too many chiefs, not enough indianshttp://www.beyondvc.com/2007/09/too-many-chiefs.html
http://www.beyondvc.com/2007/09/too-many-chiefs.html#commentsWed, 26 Sep 2007 09:23:22 +0000http://localhost/wp_beyond/?p=89Before I dive into this post, I want to apologize to those who may be sensitive to the non-PC nature of this. Anyway, as always, I have met and spoken with a number of startups during the past week. There are obviously all different types of companies with different funding needs but the ones that have stood out negatively for me are the startups that come in with a pre-baked senior management team and no product. In other words, I have major concerns when I see SVP of this and SVP of that and I wonder to myself who is going to do all the work if everyone is a Senior VP. When there are too many chiefs and not enough indians, I worry about how decisions get made and wonder if egos and titles are more important versus getting product out and customers on board. Sure, some of these teams were quite impressive but in a startup environment keeping your burn low until you get your product in the market and refined is imperative. In addition, more often than not, business models may change slightly or drastically and what you initially set out to build and deliver may not be the same in the future. What that means is that your SVP of Marketing may not the be right person 12 months from now. So do yourself one favor when starting a company-get the right people on board to get the product delivered and the first few customers and as you get feedback from the market and your team, figure out your next hiring needs. Don't worry about titles and focus on building an insanely great product. Having too many chiefs and not enough indians can burn lots of dollars and also scare away potential investors.]]>http://www.beyondvc.com/2007/09/too-many-chiefs.html/feed6Board meeting advicehttp://www.beyondvc.com/2007/09/board-meeting-a.html
http://www.beyondvc.com/2007/09/board-meeting-a.html#commentsTue, 11 Sep 2007 17:31:05 +0000http://localhost/wp_beyond/?p=94Over three years ago, I wrote a lengthy post on how to run a great board meeting. And after having been at a few board meetings in the past couple of weeks, I was reminded again of one of the most important rules of running a great board meeting - be prepared and make sure there are no surprises for you and for the board members.

Here is an excerpt from that post:

1. Be prepared: Board meetings are like theater. Like any play, I expect the CEO to have a well thought out and scripted agenda for the meeting. The most efficient way to do so is to lay out an agenda and get feedback pre-meeting from the other board members to ensure that the board covers appropriate topics and allocates the right amount of time for each one. From an update and preparedness perspective, the CEO should always go into the meeting having a complete understanding of where the various board members stand in terms of any major decisions. There should be no surprises. This means that the CEO should have individual meetings and calls in advance of the board meeting to walk each director through any decisions that need to be made and the accompanying analyses behind them.

If all you do is follow this advice then I can guarantee you that your board meetings will run more smoothly. As for my point on board meeting being like theater, my thought here is that I really believe that much of the work between active board member and CEO happen behind the scenes and not at a board meeting. Regardless of your viewpoint, I suggest leaving ample time for pure discussion. The best board meetings that I have attended are loaded with discussion on various key strategic issues and the worst are ones where we are expected to view powerpoint slide after powerpoint slide for simple updates. If you are interested in hearing more about my thoughts on board meetings, I suggest reading my earlier post.

]]>http://www.beyondvc.com/2007/09/board-meeting-a.html/feed0Learning lessons from Amp'd Mobilehttp://www.beyondvc.com/2007/07/learning-lesson.html
http://www.beyondvc.com/2007/07/learning-lesson.html#commentsTue, 31 Jul 2007 10:56:46 +0000http://localhost/wp_beyond/?p=101I am not here to pile on the Amp'd Mobile situation, but I find it is always important to learn as much as you can from your mistakes and from other people's mistakes. Rafat Ali has a great interview with Peter Adderton, the former CEO of Amp'd Mobile. Here are a couple of interesting points that Peter says helped to ultimately bring the company down:

-- You don’t raise $400 million in 18 months by spending time inside the office. Trying to ambiguously raise that amount of money, while at the same time trying to create something new and different was a challenge that caught up with us in time. -- On the financing, we were learning as we went along. With the amount of cash that we required, it probably made more sense to go with one or two big pockets than a lot of smaller pockets. -- The biggest struggle I had [with the board] was agreement on where the company should go. We had way too many board members and then we had observers at top, and the any partner could dial in, to a point where it became very difficult for the management to manage.

Rather than dive into some of the operational or economic lessons like how a company that raises $400mm can't get to profitability, I thought I would focus more on the financing side that Peter discussed with Rafat. In short, some of the lessons learned from Peter include having too many investors and too many board members. One VC once told me that having a great board did not guarantee success but having a bad board can almost certainly guarantee failure. Speaking from personal experience, it is pretty easy to see how differences in strategic direction and plans combined with egos can get in the way of real productivity. The more people you add to the mix and the more complicated and time consuming it can get. In fact, I remember spending at least 3/4 of my time on one of the weak boards dealing with bickering between other board members instead of spending my time helping management and focusing on the important issues. The CEO also had to spend just as much time massaging egos and different incentives to keep driving the company forward. At times, It was close to impossible for the board to come to agreement on a budget, hiring plans, and strategy and ultimately the company missed many opportunities. I can only imagine what Amp'd board meetings were like when you mix in a number of VCs, hedge funds, and strategics, all of whom invested in different rounds at different prices and with different preferences. So one of the lessons to be learned is to choose your partners wisely and less is more. Rather than try to spread out ownership of your business with lots of investors so one or two don't have too much control, you are better off looking for a couple of investment partners who share the same vision of the business and who you believe will act rational through both good and bad times. This is where references can help tremendously.

One other point, every second you spend fundraising is another second you are not running your business. Companies have to be well prepared and go through a number of meetings to raise $5mm let alone $400mm in 18 months. It is not hard to see how the CEO and management can get distracted and not spend enough time on operational issues when they are constantly raising capital. And of course, the more money you raise, the bigger the exit you need to get investors their 8-10x. I am not saying this happened in the Amp'd situation, but when capital is abundant and the pressure to create significant returns exist, it can force companies to try to get big fast and try to spend their way to success instead of finding the right mix of organic and inorganic growth. That is why I have always loved capital efficient business models.

]]>http://www.beyondvc.com/2007/07/learning-lesson.html/feed2What kind of customer do you have?http://www.beyondvc.com/2007/06/what-kind-of-cu.html
http://www.beyondvc.com/2007/06/what-kind-of-cu.html#commentsWed, 27 Jun 2007 16:33:23 +0000http://localhost/wp_beyond/?p=105I was in two board meetings recently, and I was shocked at myself when I seemingly gave contradictory advice to two companies. On the one hand, I told the first company to do whatever it takes to land that big account for the quarter, and on the other hand, I told the second company to push harder for a higher price or to walk away. Shouldn't you always do whatever it takes to land a customer and continue building the pipeline? Yes, in theory, but at the same time you have to understand what kind of customer you have: is it a good customer or a bad customer. While there is no perfect definition for these two types of customers, let me give it a try. In the first portfolio company's case, the good customer we were going after was going to be a marquee win and great reference for future prospects down the line, would help us validate our technology and team in a head-to-head competition vs. the big incumbent, and finally would be a repeatable sale where we could take and package our software to many other prospects. In that case, we told the company to be aggressive in order to land that customer, including giving it away for free for a short period of time to get that first big win. The great news is that we landed that marquee customer and did not have to go the free route. Ideally a good customer is also one that is profitable. In this case, even though the first marquee win may not have been profitable in year 1, we were able to see future profitability down the line from expansion opportunities in the existing account and from that customer serving as a great reference and industry leader in helping us close other deals.

A bad customer is clearly the complete opposite of a good customer - one that requires too much one-off customization, is not a marquee account or potentially a great reference for future sales prospects, and ultimately an account that does not lead to repeatable sales. In addition, bad customers for the most part will be highly unprofitable as you will probably spend way too much time on the account trying to make it referenceable. So in the second portfolio company's case, given that we had a bad customer, I told them that we should go back to them to charge more to at least make some money from the current deal or walk away. Ideally, if it is a bad customer, you may just want to walk away altogether to go find that good customer which will lead you to many more great opportunities. Starting your company with a handful of bad customers can kill your business so be ruthless with your time and carefully assess what kind of customer you are about to close.

]]>http://www.beyondvc.com/2007/06/what-kind-of-cu.html/feed3Don't forget to look at venture debt when raising a new roundhttp://www.beyondvc.com/2007/06/dont_forget_to_.html
http://www.beyondvc.com/2007/06/dont_forget_to_.html#commentsMon, 11 Jun 2007 14:08:51 +0000http://localhost/wp_beyond/?p=107We all know the story - it is incredibly cheaper to start a web-based business versus 5 years ago with the rise of open source software and commodity servers. However, while getting started with thousands of users is cheap, scaling to significant numbers will require some dollars. The good news for you and for venture investors is that your buck can go alot further today versus yesterday not only because of the commoditization of infrastructure but also because the venture debt market is alive and kicking. In the last six months, we have augmented some of our existing venture financing with venture debt as the market has become quite competitive which means pricing and terms are getting more attractive for all of us. In addition, while most associate venture debt with investments in companies with core technology, more and more venture debt firms are back and willing to offer capital to earlier stage web-based companies with no financial covenants and MAC (material adverse change) clauses. Of course the more flexibility you have with respect to uses of cash means that pricing will go up. All I can say is when evaluating your company's cash needs and potential runway, looking at the venture debt market is not a bad idea.

There is also another market metric that is driving a renewed interest in web-based companies for these lenders- they are getting funded by VCs (venture debt lenders mostly like to do deals with strong financial sponsors which increases their likelihood of getting paid back) and these startups are better able to manage their burn rates reducing risk and offering lots of upside. Sure, while some of these venture debt firms recognize that web-based businesses may not have as much hard and true intellectual property, the fact that they are more capital efficient and can scale more rapidly means they can also generate pretty nice returns from the warrant portion of their deal. Getting in earlier also allows these venture debt firms to buy more of the company from a warrant perspective than getting in on later rounds. The trick for entrepreneurs is to look at bringing on debt concurrent or soon after your close of equity financing.

Why can raising venture debt be great? It is quite simple - the dollars are relatively cheap compared to an equity financing and extending your runway to hit more critical milestones means a potentially better valuation for your company down the road. And of course if you exit before raising another round, there are more dollars available for the equity holders. A typical structure for an early stage deal could be an equity raise of $3-5mm with another $1-2.5mm of debt. From a pricing and terms perspective, you should look for capital which is flexible in terms of use for true growth capital (growing your business) with no financial covenants or MAC (material adverse change clauses) which can put more risk into the debt equation. Of course, the more flexibility you have, the higher the interest rate will be relative to other types of loans. Most venture debt deals will have an interest only portion for a short period of time before amortization (monthly payments of principal and interest kick in). Typically you will see terms of 30-36 months where your lender will get paid his full portion of the loan and interest by that time frame. In addition, lenders will ask for warrants equal to a percentage of the dollar amount raised (for example, depending on the deal, a 5% coverage for $1mm could be equal to $50k of equity to be purchased at the current share price).

All is not rosy as there are some potential and hazardous downsides to this model. If you burn through your cash and can't make the monthly principal and interest payments, your lender can take over your company as their debt is usually secured against your company and intellectual property. Trust me, a number of companies got burned with this during the Internet boom when their businesses were based on wildly inflated revenue projections and unilimited capital resources. Just when you needed another month or two to sign that strategic deal, the venture debt guys would come in and pull the rug from under you. Granted it is not that bad as your lenders are your partners and will negotiate with you, but at the end of the day, if they see their ability to get paid in significant jeopardy, they will do what they have to do to recoup as much value as possible. For some investors and entrepreneurs, this risk may not be worth the dollars. For others who are confident in their execution and ability to raise another round, there is no better way to stretch your dollars in the company and create more value with minimal dilution. So the next time you hear the word "debt," don't be scared and keep an open mind as you may be able to stretch your resources further and achieve some additional critical milestones driving increased value in your business. The interest in web-based businesses is there and the competitive market means that pricing and terms are pretty attractive now.

]]>http://www.beyondvc.com/2007/06/dont_forget_to_.html/feed6Transitioning from startup to growth phase – don’t be afraid of processhttp://www.beyondvc.com/2007/05/transitioning_f.html
http://www.beyondvc.com/2007/05/transitioning_f.html#commentsWed, 30 May 2007 08:06:52 +0000http://localhost/wp_beyond/?p=108As an early stage investor and board member of several companies, I am fortunate to get the opportunity to work with some great entrepreneurs and also pattern match and observe trends, both good and bad, in early stage companies. I am not here to throw platitudes at you but simply to share an observation of the differences between some of the better run companies and the ones that have less than stellar execution. In one portfolio company, we had some of the standard issues of coordinating product management with engineering and balancing sales requirements with engineering priorities. Having a company operate solely in departmental silos is like having each body part with a different brain-sure it is your body but it is also hard to move fluidly if each body part is moving in a different direction. As I spent time with management, I quickly recognized that there was no real communication of company goals and awareness of what each department's priorities were. This is a standard problem I have seen time and time again as companies transition from startup and initial product development to company growth and expansion. There is no panacea for turning things around overnight, but I can assure you that layering the proper amount of structure and organization is an important element in improving cross-functional communication.

What makes a startup team great early on in terms of getting product out the door and rapidly refining and honing the product from live market feedback can also lead to issues down the road if companies and employees are managed on a similar basis. What is easy to roll out in a 5 person company gets harder to manage in a 25 person and even harder in a 50 person company. Take the test - ask your key executives what the 3 key company goals are for the month? Are they the same or not? How will they help contribute in each of their functions to delivering on the 3 key company goals? If they are not on the same page and you have trouble getting them together, you may want to continue reading for some thoughts on how to improve communication and accountability.

Here are some simple steps you can take to create a more fluid organization. First, institute a weekly management meeting. Yes, like you, I have an allergic reaction to the word meeting, but believe it or not, simple processes can help tremendously. It is a great way for the CEO to get input but also guide the team to focus on the same company goals for the month or quarter. Secondly, have key team members provide a weekly dashboard report and list of key goals to accomplish for the following week. At every weekly management meeting, have each team member discuss progress against his/her team's goals and what they will be working on for the following week. How does each of the departmental goals contribute to helping the company meet its goals? Once again, this all may seem simplistic and a giant waste of time versus managing the next product release, but you will be amazed at the number of companies I meet that have not gotten to this point and consequently seem to have different ideas of what the business is and how to get there. In addition, having weekly management meetings and clear weekly goals with simple yes/no criteria goes a long way towards creating an action-oriented culture of getting results. If a VP doesn't deliver consistently, all of the other executives know and they also know it is time to make a change. No one wants to be the manager that is known to overpromise and not deliver. There is also a real difference between a manager having weekly individual meetings with their CEO vs. openly discussing theirr priorities and completed tasks with their peers. With respect to cross functional communication, rather than complaining about engineering, for example, sales and marketing can now understand engineering priorities and what it may take to adjust and rearrange some of them to meet the revenue targets for the quarter. Trust me, there are many more factors to a company's success and failure, but please don't make an allergic reaction to scheduled meetings and a simple lack of organization your cause for execution problems.

]]>http://www.beyondvc.com/2007/05/transitioning_f.html/feed7What a Microsoft-Yahoo deal would mean for startupshttp://www.beyondvc.com/2007/05/what_a_microsof.html
http://www.beyondvc.com/2007/05/what_a_microsof.html#commentsFri, 04 May 2007 11:55:16 +0000http://localhost/wp_beyond/?p=113The rumors of a pending Microsoft-Yahoo deal are out in the market again today (see NYPost and Techmeme). Who knows if it will happen but rest assured if it did, Microsoft would be in a pretty good position to take on Google with Yahoo's user and advertising base combined with Microsoft's strength in development tools and aggressive strategy to go grassroots and emerge as the platform of choice to build next generation web sites and applications. All that being said, let's take a moment to think about what this would mean for entrepreneurs.

It is pretty clear what is happening in the market today - Google is dominating and the Internet advertising game is a game of scale. The bigger you are the more opportunities you have to increase your lead - more users equals more data equals better targeting equals more money per click. In addition with lots of inventory and excellent targeting, it is easier to attract more advertisers. And as we all know, much of this whole Web 2.0 (yeah-I hate that term) world is based on advertising, advertising from Google AdSense and other partners. Why not outsource your whole ad sales team as you can get a pretty good deal from Google without any operating expenses? If you do the math, startups really do need a fair amount of traffic to merit hiring its own internal ad sales team. Consequently, we have seen tons of web startups launch over the years as it is really cheap to build a web-based product and costs no upfront capital to start generating revenue.

I am not sure about your own analysis but based on a number of portfolio companies, I can tell you that Google Adsense delivers the best results bar none in terms of generating revenue. In a world without a combined Microsoft-Yahoo, it is pretty clear that Google will only get stronger leaving it with a virtual monopoly in the online ad game. And as you know, monopolies over time take advantage of their position by changing pricing in their favor. I am sure every company that is generating money from Google Adsense worries about the day when the revenue splits could change. So on the positive side, a combined Microsoft-Yahoo would hopefully give startups another real alternative to Google Adsense as the combined entity would have real scale like Google and therefore the ability to deliver Google like results. On the negative side, a combination would mean that there is one less aggressive acquirer on the market. So if the Internet ad game is one of scale, you can bet that in the future there will be a high likelihood of further consolidation. What this means is that entrepreneurs who are starting companies to be acquired better think twice as their chances of winning the lottery will diminish with time. What this also means is that entrepreneurs need to start companies for the right reason and focus on building a real business versus the quick flip.

]]>http://www.beyondvc.com/2007/05/what_a_microsof.html/feed1From Web 2.0 to Business 2.0 – MySpace pulls Photobucket videoshttp://www.beyondvc.com/2007/04/from_web_20_to_.html
http://www.beyondvc.com/2007/04/from_web_20_to_.html#commentsWed, 11 Apr 2007 10:45:43 +0000http://localhost/wp_beyond/?p=118The alarm bells are ringing in the web world (see the Techmeme discussion) - one of the gorillas in the space is flexing its muscle and protecting its turf as MySpace is preventing Photobucket photos and videos from appearing on its site. As Om Malik mentions, this happened once before and I am sure the MySpace folks have done some hard thinking about whether or not their users will vote with their feet and leave, and if they do, what kind of impact it will have on its business. I guess they figure it won't be too large of an impact for them. Anyway, all of this is not a surprise as this is the way business works. Forget about Web 2.0, this is Business 2.0 (ok, someone else already has the trademark). The world of openness is only open so much because if you get to0 big and threaten someone's turf and livelihood, guess what...they will fight back. I put a timely post up two days ago titled "Why Startups Must Control Their Own Destiny." The point is that the only person you can really rely on is yourself and in this world of mashups, widgets, and open APIs, distribution is easy...getting money is hard. Well guess what-distribution via widgets on MySpace was relatively frictionless, but now that Photobucket is a serious player, the Gorilla is fighting back and that is just the way the world works. I am not saying that you should not leverage free distribution, but that you should prepare yourself for the day that it may disappear. In one of my portfolio companies we have a saying, "Google giveth and Google taketh away." The point is you should take a hard look at your business, and if you are too dependent on any one partner or distribution method, you should stay awake every night thinking about how to diversify your business. And for those who built their business off of one partner and think they are worth hundreds of millions or billions of dollars, I can assure you that if that one partner is not buying you, there will be appropriate discounts paid to your business based on the fact that the acquiring company's competitor could shut your lifeline off tomorrow. Yeah, this is nasty stuff, but this is business and companies need to make money.]]>http://www.beyondvc.com/2007/04/from_web_20_to_.html/feed2Why startups need to control their own destinyhttp://www.beyondvc.com/2007/04/why_startups_ne-2.html
http://www.beyondvc.com/2007/04/why_startups_ne-2.html#commentsMon, 09 Apr 2007 23:37:43 +0000http://localhost/wp_beyond/?p=120I was in a board meeting last week, and as we reviewed the results one item quickly jumped off the page - the company did a great job signing up a couple of Tier 1 partners but a less than stellar job driving results. This was not surprising as what happens more often than not is that we can get caught up in the thrill of the chase, signing a big deal for example, but forget that the real work begins after the deal is inked and the press release hits the wire. Signing a deal in and of itself does not bring on any new customers and the more successful startups understand that. The teams that can drive successful relationships keep pushing its larger partner, putting together a plan with expected goals, driving implementation, creating product literature for the new partnership, offering new ideas, asking for marketing dollars, and coming up with new innovative campaigns to drive adoption. They just make things happen and are just as relentless after the deal as they were before the deal was signed. The less successful teams will let the big partner move at its own pace, dictate the terms, and wait for them to take the next step.

This brings up another interesting point. Even if you follow the steps above, this does not guarantee success. Big companies move slowly and often change their minds. A relationship with a big company will surely take time and cost you money whether in upfront dollars or expenditures on resources. And while we would all love to build our business off the back's of other brands and distribution, at the end of the day, in order to create a big winner, it is imperative for startups to control their own destiny. This means that your business has to be able to grow organically and not have its fate fully dependent on its partners. What this means is that first and foremost you have to have a killer product, one that people love, can't live without, and share with others. In this new world of mashups, open APIs, and widgets, startups can easily get distribution. Getting customers and revenue is a different story altogether. Remember, distribution doesn't matter if people don't use your product or service so start with the basics and figure out how to make your product a must have that someone will pay for.

]]>http://www.beyondvc.com/2007/04/why_startups_ne-2.html/feed1Microsoft VC Summit 2007http://www.beyondvc.com/2007/03/microsoft_vc_su.html
http://www.beyondvc.com/2007/03/microsoft_vc_su.html#commentsMon, 19 Mar 2007 10:59:28 +0000http://localhost/wp_beyond/?p=121The day after Microsoft's TellMe aquisition, I was at Microsoft's eighth annual VC Summit. Unfortunately, I missed Steve Ballmer's opening discussion, which in my opinion, is always one of the most entertaining and informative sessions of the event. For the last few years, Steve spoke at the end of the event but for some reason they switched it on us and had him at the beginning. Anyway, I am waiting for some other bloggers to summarize his discussion. Notice the picture I link to from Paul Jozefak's blog titled "Expanding Platform to the Cloud." I must say that I came away quite impressed by Microsoft's progress in its cloud and Windows Live strategy. Last year, all of the Windows Live talk seemed quite rushed, disjointed and forced and seemed it was more of a response to the market saying that Microsoft did not get the SAAS thing. This year the strategy seemed much clearer and well defined and the executives knew how the Internet and cloud fit into all of the various business units. In the end, Microsoft has made some huge strides and will certainly be worth watching over the next year. In addition, as with each year, I did find the Microsoft executives more willing than ever to network with startups to fill gaps in their product line and to be a more open, gentler Microsoft versus years ago. There is nothing like real competition to get a company to change its mindset. Sure, they didn't tell us much in the public sessions as sometimes you can come away with the impression that Microsoft is doing everything and the only opportunities for startups are niche verticals built on Microsoft's platform. But truth be told, if you actually did get a chance to spend some one-on-one time with the executives, you will find a much different story. Reflecting on that point, Microsoft made a little over 20 acquisitions last year and plans on doing a similar amount this year. One sure way to not get any partnership done is openly ask the Microsoft executives, "How do I get my portfolio company acquired?" The real point is to find and network with the key executives at the summit and figure out how the individual business unit's process works on a partnership discussion and get that started.

The consumer mobile breakout session was one of the more informative discussions that I attended. Basically as the world moves to three dominant operating systems for wireless (Symbian, Windows Mobile, and Linux), Microsoft will look to increase its penetration by leveraging an extensive development platform to allow third party partners to develop new consumer services which can be easily deployed via its worldwide carrier partners. Naturally, one of the questions asked was if these apps only worked on Windows Mobile or across the various operating systems. As you might suspect, these apps would likely work better on the Windows Mobile platform, but the Microsoft folks did stress that it does and has to work with other competing operating systems as well. The gaps that Microsoft was looking to fill through partnerships or acquisition were, broadly speaking: games/entertainment, location aware services, TV/video (although the one Microsoft executive acknowledged it was overhyped), ad management, mobile content mgmt, and billing and payments. One of the value propositions offered by the Microsoft mobile folks was key relationships with carriers across the world.

Another engaging talk was Peter Moore's (Corporate VP, Interactive Entertainment Business) presentation on Microsoft's move into the digital home with its Xbox360. Of course, after a long day, seeing a commercial for the yet-to-be-released Halo 3 was quite energetic and refreshing. Interestingly enough, it is quite amazing to see that as these gaming machines get more powerful, the games themselves end up being the commercial (think about The Gears of War commercial on television). Despite the fact that Peter could have spent hours demoing games, his presentation centered around the full featured entertainment capabilities of the device which included the ability to synch with other PCs in the home and buy movies, television shows, and music in a simple way. Once again, it is amazing how much progress is being made throughout the many divisions at Microsoft and how the Internet and on-demand services are getting weaved into the very fabric of the applications and infrastructure. For a large company, one year has made a huge difference. Finally, one of the other recurring themes I heard throughout the day was the importance of advertising in many of its product lines ranging from mobile to MSN to the digital home and video gaming. If there are other acquisitions to be done, I am sure that some interesting advertising related technology and services will be on their radar screen.

Just to be clear, this is not in any way, shape or form a Microsoft love-fest. I am just pointing out that while so many people are counting them out that they have lots of cash, renewed energy, and a long-term view towards winning in their markets.

]]>http://www.beyondvc.com/2007/03/microsoft_vc_su.html/feed4The fine line between dilution and delusionhttp://www.beyondvc.com/2007/02/the_fine_line_b.html
http://www.beyondvc.com/2007/02/the_fine_line_b.html#commentsTue, 06 Feb 2007 22:30:00 +0000http://localhost/wp_beyond/?p=127It has been stated that there is a fine line between genius and insanity but who's to tell where one ends and the other begins. I can also say that there is a similarly fine line between dilution and delusion but this one is easier to draw. Recently my partners and I were discussing the merits of a term sheet that came in for a portfolio company. While the term sheet did not meet our expectations 100%, there were a number of strong points. Unfortunately, the entrepreneur was not terribly pleased as he had a much higher expectation for round size and valuation in his head. As we walked through the process for the current round of financing, my partners and I clearly understood that while we can guide the market with our pricing expectations, that ultimately the market decides. So if faced with this situation, my only word of advice for entrepreneurs is that it is important to know that there is a fine line between dilution and delusion. Talking to 1 or 2 investors does not ultimately give you a great idea of what you are worth and under that scenario I would encourage you to meet a number of folks to get an idea of what the market thinks about your business. However, if you have already met a number of firms and they are giving you consistent feedback about how much money to raise and at what price, you may be delusional to keep pressing on in search of optimizing a valuation which no one is willing to pay. In fact, to be clear, valuation isn't everything and there are many situations where having too high a valuation for an early stage company can be detrimental as it can set unrealistic expectations for your team and your investors. Being priced for perfection means that:

1. a company that is performing quite well may be still be viewed as a failure in the eyes of the existing investors and team.

2. your company must really hit significant milestones to raise a next round of funding at a higher price.

3. it may take too long to raise funding to find the right investor who will pay the valuation you are looking for

4. a potentially great exit for your company may never happen because it doesn't meet the bar for your last round of financing.

So if the market is giving you a strong signal, listen and remember there is more to a financing than price and you need to carefully balance a number of factors such as other terms in the deal, an investor's ability to add value, and your ability to work with the lead partner and his firm.

]]>http://www.beyondvc.com/2007/02/the_fine_line_b.html/feed4Why vision statements matterhttp://www.beyondvc.com/2007/01/mission_stateme.html
http://www.beyondvc.com/2007/01/mission_stateme.html#commentsMon, 29 Jan 2007 08:46:52 +0000http://localhost/wp_beyond/?p=131Vision statements matter. Sometimes we get too focused on the daily bump and grind, the next product release, and forget about the big picture and what we are trying to accomplish (see an earlier post on Vision). Trust me, the word vision became a dirty word during the bubble as many companies were long on vision and short on execution. I am not advocating that we return to that environment, but I am strongly saying that companies do need a vision and that it can help them with their execution.

I went out to dinner a couple weeks ago with a few key executives at a portfolio company and as we started talking about future product direction, it seemed that we all had different ideas of where the company should go. Seeing some confusion I tried to get us focused back on the basics when I asked the team what our vision was. The first pitch was great and so were the others but unfortunately they were all different. It is really hard to drive future product direction when your key executives can't agree on what the company should be when it grows up. In addition, it is quite difficult to get your employees on the same page without a simple, succinct vision. Furthermore, it is hard to build word of mouth marketing without boiling down who you are and what you do in a memorable and short manner. Yes, it can be challenging to distill everything you are doing into a short pitch but great companies are able to do this. So let's look at a few companies in the highly competitive video space that have managed to stand out from the crowd (other than YouTube) and break down their vision statements and taglines:

1. Metacafe: Metacafe is one of the world's largest online video broadcasters with a global audience of 16 million unique visitors (comScore Media Metrix) watching over 400 million videos each month. Using our VideoRank™ technology, Metacafe is the only site that mines the collective wisdom of its audience to filter and surface the most entertaining videos, making it the best place to both watch and distribute high quality video content.

Tagline: Serving the world's best videos

(its saying I'm a pretty big player and it gives you the best videos,not just every video - secret sauce is its VideoRank technology)

2. Revver: Revver is a video-sharing platform built the way the internet really works. We support the free and unlimited sharing of media. Our unique technology tracks and monetizes videos as they spread virally across the web, so no matter where your creativity travels, you benefit.

Tagline: What if creativity could pay the rent?

(sounds a little techie-video sharing platform the way the internet works? the differentiation is in the fact you get paid-the vision sounds like it is more focused on the publisher than the consumer, secret sauce is its platform to pay creators)

So they are both video sharing sites but each has its unique spin to help its employees and users spread the word in a simple way. In addition, I am sure that their respective vision statements helps guide their future product direction. Revver probably asks itself, does my next release help me further strengthen my advantage as the best platform to get publishers paid. Metacafe probably is constantly working to improve its community based voting and algorithms.

The trick is to make your vision broad enough to allow you to grow into it, yet be differentiated, and obviously simple to remember. You want all of your employees when they are talking on the phone with customers or friends or even at cocktail parties to give a simple description of what your company does and how it does it. You want the next degree of relationships to be able to explain just as easily as your employees - this is how great buzz builds. You want your key product guys asking themselves how does this next release help our company continue to deliver against our vision. So remember before launching into a variety of different directions, think long and hard about where you want the company to go and how to distill that vision into an understandable and simple pitch to help get the message out. Take the simple litmus test at your next management meeting to see if you are all rowing in the same boat or different ones. Doing this does not guarantee success but definitely helps get you and your team moving in the right and more importantly the SAME direction.

]]>http://www.beyondvc.com/2007/01/mission_stateme.html/feed7Bring out yer dead…I’m not deadhttp://www.beyondvc.com/2007/01/bring_out_yer_d.html
http://www.beyondvc.com/2007/01/bring_out_yer_d.html#commentsThu, 11 Jan 2007 11:09:38 +0000http://localhost/wp_beyond/?p=135We all know that there is something different this time about the web startup market. As I have written before, it costs next to nothing to get a service on the web (look at MyBlogLog as an example), the market is much bigger as broadband penetration has grown from 10% to 50% over the last 5 years, and I hope that we have all gotten more prudent with the amount of funding that startups initially need to get their service up and running. This cuts both ways as a lower barrier to starting a company means a lot more competition in each market. Given that, it is not surprising to me that a number of startups that have raised money over the last 12 months seem to be making the news in the blogosphere for laying off staff or even (GASP) going out of business. The timing seems about right - startups raise about 12-18 months of cash to hit some key milestones and then either go out for more funding, get acquired or go out of business. Until now, most of the news was centered around the first two paths. So it is inevitable that we will hear about failures especially as management teams and investors make the hard decision to pull the plug early rather than plod along. This also may mean that rationality is still with us as people understand that funding the 30th tagging site or 50th video site may not be the best use of capital.

If there are always going to be 1-3 winners in a space, then more competitors equals more failures. Combine this with the fact that this new resurgence of web startups is much more publicized and transparent than the first generation. So more startups and more news outlets and blogs means that we are only going to hear more and more bad news in 2007. That's ok. We have to remember that in the echo chamber of the blogosphere, this news of death and layoffs seems to reverberate quite loudly. Just because we hear about it and hear about it from more sources does not mean that the sky is falling. From my perspective, this is no different than the past. Startups are risky and a number won't make it but some will hit it big. In addition, startups have to be flexible and more often than not their business models will adapt once they are out in the market which means a layoff or two may happen.

This reminds of the scene from the movie Monty Python and The Holy Grail where the dead collector comes through town to clean up the streets. As he pushes his cart through the town, people start piling up dead bodies. However, one seemingly dead body claims he isn't dead. The same goes for web startups - we will see more bad news but that does not mean the market is over. It also doesn't mean that we shouldn't write about the failures as we can all learn from them.

Just to be clear, the fact that it seems like more and more startups are running into hard times does not mean that the market is in serious trouble. And while I believe the failure rate may be even higher in this go round, I also expect that the dollars lost per failure will be orders of magnitude lower than in the first Internet wave. When the 30th tagging site or 50th video site have hard times, that is not cause for alarm. What will scare me is if we start seeing more unproven startups raise significant amounts of first round capital at frothy valuations and spend it on Super Bowl commercials or if Google starts to hit the skids.

]]>http://www.beyondvc.com/2007/01/bring_out_yer_d.html/feed4Communicating with your boardhttp://www.beyondvc.com/2007/01/communicating_w.html
http://www.beyondvc.com/2007/01/communicating_w.html#commentsThu, 04 Jan 2007 11:34:04 +0000http://localhost/wp_beyond/?p=138A couple weeks ago I sat down with a new CEO of one of our portfolio companies, and we discussed goals for 2007 and what I and the board expected of him. Yes, there was your usual conversation about getting more customers, building out a team, and ramping up revenue while managing costs, but one of the most important points I made to him was in how to communicate with the board. I can tell you that one area where many first-time CEOs fail is in communicating and working with their board. Either they don't give you enough information, they give you too much, or they feel that the only news to share is good news. I have written a few posts in the past on board communication including We Don't Like Surprises and the VC/Entrepreneur Relationship. Given how important this is, I thought I would share a few simple thoughts with you.

With respect to your information flow, make it timely, transparent, and relevant:

1. Timely: we don't like surprises. Tell me in advance. When you think we are going to miss the quarter by a significant amount, don't tell me 2 days before the end of the quarter, tell me as soon as you can. We are partners and this gives us all an opportunity to prepare contingency plans in advance or control our hiring before we run into a wall. CEOs who communicate well make sure the bad news travels just as quickly as the good news. If you don't tell us early, we can't help you.

2. Transparent: let me know as clearly and concisely what the issue is and don't spin me. Transparency means sharing the raw data with me as well as the short summary of why something happened positively or negatively. If we don't get a deal this quarter, and you really don't think it will happen, don't keep it on the sales pipeline and set the wrong expectations for us.

3. Relevant: I don't need to know every little detail of your day-to-day operations but we also do need to be apprised of what is important. Relevancy of course changes with company stage as well. Knowing as soon as possible about the first couple of engineering hires is relevant in a startup but knowing about the 10th engineer does not require a real-time update. If you not sure if a specific update is relevant, err on the side of more is better. Sending an email update out to the board is simple, and trust me, if the news is important, those board members who are more engaged or concerned will reach out to you. If it really is a big issue (positive or negative), I suggest calling a few of the board members to discuss with them.

At the end of the day, information flow comes down to trust - board members trusting the CEO and the CEO trusting the board. The CEO-Board relationship is a two way street. Board members have to be just as direct, open, and upfront with respect to our expectations for the CEO and the management team. This means getting a plan in place for the year that is discussed, vetted, and ultimately finalized which the board and the management team sign up to. If you abide by these simple rules, I can assure you that these tips will go a long way towards helping you build a very strong and healthy relationship with your board. At the end of the day, keeping any relationship strong and thriving is dependent on how well everyone communicates with each other.

]]>http://www.beyondvc.com/2007/01/communicating_w.html/feed6Bringing the Valley to New Yorkhttp://www.beyondvc.com/2006/12/bringing_the_va.html
http://www.beyondvc.com/2006/12/bringing_the_va.html#commentsSun, 31 Dec 2006 09:56:16 +0000http://localhost/wp_beyond/?p=139There are many things that I am thankful for this year, but one of the best things that could happen to the New York tech scene is the growth of Google. Last year Google opened a huge office in Chelsea and moved about 500 employees into the new location. While I initially thought that most of the staffers would be associated with advertising sales or content business development, through my various visits to the office I was surprised to learn that there were lots of engineers working on some significant projects in New York like Google Maps and Google Mobile Search. There is an interesting article in today's New York Times about the the Googleplex in Manhattan and how the Silicon Valley culture is being brought to New York.

The strategy of keeping employees happy and committed to spending endless hours on campus seems to be working. Richard Burdon, 37, an engineer who joined Google two years ago, has been staying past midnight to prepare for the introduction of a project. (Google’s Manhattan engineers have been responsible for developing Google Maps and are working on some 100 other projects.)

“Google is about as interesting as starting your own startup because you can really follow your own ideas,” said Mr. Burdon, who previously worked for Goldman Sachs, Sony and I.B.M. The only time he could remember leaving the office during the workday was to buy a friend a birthday present.

As a New York-based venture capitalist, this is great news. While many employees continue to enjoy the meteoric growth of the company, I am quite excited at the prospect of having hundreds of well-trained engineers and product managers in New York who will one day want to start their own company. New York has always had a talented and core group of technologists, many of whom are working on startup number 2 or 3, but what gets me excited is the idea that many newbies to the startup and web culture will have the opportunity to experience the fast-paced, engineering driven world of Google. It is precisely the engineers like Richard Burdon mentioned above who worked at major corporations like Goldman Sachs, Sony, and IBM, who may have never left their jobs for a startup but did so for Google. It is also many of these engineers, once they get their feet wet in an engineer driven culture, who will eventually want to leave and start their own companies contributing to the continued emergence of New York as a great place to launch a web startup.

]]>http://www.beyondvc.com/2006/12/bringing_the_va.html/feed7Small business startup kit for 2007 – mostly free!http://www.beyondvc.com/2006/12/small_business_.html
http://www.beyondvc.com/2006/12/small_business_.html#commentsFri, 22 Dec 2006 14:19:55 +0000http://localhost/wp_beyond/?p=140A friend of mine called me the other day to ask for advice on what services (email, voice, apps) he should use to run his business with the caveat being that he wanted to spend as little upfront capital as possible and also have minimal ongoing maintenance headaches. As I started thinking about his question, I remember what it was like setting up our office in 1998 and the headaches and cost of buying a Nortel phone system and phones and hiring a Microsoft networking expert to get our office set up for file sharing, back up, and email. What a nightmare! What was even worse was that we had to have this guy come in at least once a month for general maintenance. So when we moved in the beginning of 2004, I vowed to outsource as much as possible. In the end, here is what we did:

1. Exchange server - USA.net - pay monthly based on number of mailboxes and mailbox size and eliminates the headache of ongoing maintenance and backup. also can add mobile devices like Blackberry, Good-enabled, etc. and easily provision without cap x.2. Voice-outsourced VOIP, we have a direct pipe to a local provider, we leased some Cisco phones, and once again no upfront cap x and lots of great functionality, we pay a base monthly fee for unlimited calling.3. Security - we bought some Cisco gear but have a small IT firm as our managed service provider remotely monitoring and updating the software with the latest patches and release.4. Connectivity = We are networked internally on Windows and have a shared drive where we can access files. In addition, we have a VPN for remote access to this share drive.5. Productivity - Microsoft Office

Going back to my friend's question, if I could set up my office now, here is what I would do:

1. Exchange server - I hate exchange and I would bail on this as soon as I can. Instead, I would get all of my email and calendaring functionality through Google Apps for your domain - it is free and provides 2 gb of email, integrated calendaring with your email, chat and simple voice chat, and an ability to create simple web pages. Yes this is basic but it is easy. In addition, I expect a lot more to be offered once Jotspot is integrated along with some of the other basic Google Office apps such as word processing and spreadsheet functionality. My one big beef which is holding me back right now is the lack of simple syncing with wireless devices. There are some apps you can plug in to sync Google calendar but they still need some work. 2. Voice - if I want something more robust I would get a Fonality PBXtra for $995. If you choose to go the really simple route, the PC-only VOIP providers of today have come a long way since 2004. I am partial to Gizmo Project (wait for our new version which will be accessible through a browser - also, full disclosure, I am on the board) but Skype and other services can once again offer you pretty decent voice communications and functionality like the ability to buy your own phone number, call forwarding, and dual ringing on your computer or cell phone.3. Security - not as important if your files are hosted offline and backed up remotely (try xdrive which is free for 5 gb or box.net (free for 1gb). 4. Connectivity - a simple wifi network in the office can get you simple file sharing without an IT professional's help. If you want to collaborate with remote workers, you can use a wiki like Jotspot or Socialtext or some of the shared storage services I mention above. As far as remote acccess, no VPN is needed as a simple GoToMyPc account ($19.95 per pc per month) or LogMeIn (free for base functionality) can get you the access that you need without the headaches and upfront cost of a VPN.5. Productivity-Microsoft Office but the online apps are getting better and in fact for collaboration or sharing would consider Google Office apps like spreadsheets and writely

What is amazing to me is how far and how fast we have come during the last 2 years. The big difference is that the functionality is even better and so is the price - mostly free! Given this, I wonder what we will be looking at 2 years from now? Yes, one problem is that all of the solutions I list above are dependent on having an Internet connection. What if I am not online and need access to my calendar or some office documents? Since this is a pretty clear problem, my prediction for 2007 is that online apps get better offline client like functionality. Maybe it will be the new Adobe Apollo platform that makes it happen for us? What is clear is that one of the benefits of SAAS for developers is that they don't have to code in multiple platforms. Once you start diving into the murky world of multiple operating systems and developing clients for Windows, Mac, and Linux, it can quickly become quite messy and resource intensive. That is why I also see 2007 as the year that offline apps become big as the Apollo platform is released and allows web developers to build an application on one platform that can be deployed cross operating system. Also keep an eye out for Microsoft's WPF/e (windows presentation framework everywhere see an earlier post for more info on wpf). This is a big deal and will help SAAS-based apps continue its upward trajectory and spread from consumers to SMBs and even further into enterprises. As an example, take a look at Jeff Nolan's recent post about how frustrated he is with Exchange and how GMail provides a nice alternative. With the ability to get my whole office set up with a few clicks, it is no wonder that Microsoft is running scared and embracing SAAS rather than fighting it.

]]>http://www.beyondvc.com/2006/12/small_business_.html/feed11Setting unattainable goals can hurt your companyhttp://www.beyondvc.com/2006/12/planning_for_ne.html
http://www.beyondvc.com/2006/12/planning_for_ne.html#commentsThu, 07 Dec 2006 06:16:08 +0000http://localhost/wp_beyond/?p=149It is near the end of the year and I would hope by now that most companies have been through a revision or two of their strategic plan and budget for 2007. While strategic planning and budgeting is a task that some may find quite onerous or even useless, it is an imperative process and one that will help align your team and continue driving the growth of your business. Rather than go into a step-by-step walkthrough of this process, I thought it would be more helpful if I share with you the number one mistake I see made year in and year out - companies putting together plans and revenue targets which are unattainable. Look, we all want our companies to excel and stretch to reach their goals but at the same time setting a bar in the clouds can be detrimental to you and your company's health.

Why is this a problem? First, creating a plan that is too ambitious only sets you and the company up for failure. People don't like to fail and you and your employees can get demoralized after repeatedly missing targets by a significant amount and especially if your compensation is tied to a plan that will never be realized. Secondly, in trying to hit an unattainable plan, management teams typically make another huge mistake - overhiring too early or frontloading all of their hires to spend their way to success. What this does is speed up cash burn without delivering the desired results. In an earlier post, I mentioned how hiring too far in advance of your market can lead to ruin:

"Do more with less and be careful of ramping up sales until you have a repeatable selling model. In other words do not hire too many sales people and send them on a wild goose chase until you have built the right product, honed the value proposition, identified a few target markets with pain, and can easily replicate the sales process and model from some of your customer wins."

So just do yourself a favor when you build your strategic plan for next year - get input from all of the key stakeholders (sales, marketing, engineering), get them to buy off on the plan, and put together goals that force the company to perform at its best while at the same time being grounded in reality. A good possible solution is for your company to lay out 2 plans - a baseline growth plan which the board approves and an upside plan that has a higher benchmark which the employees use as their goal. What this does is allow companies to manage to a certain burn rate (baseline) but at the same time continue to push its teams to excel and deliver results. If the company exceeds the baseline plan in a certain quarter, companies can always add a few more people to maintain the upside growth.

]]>http://www.beyondvc.com/2006/12/planning_for_ne.html/feed1What startups can learn from Nintendohttp://www.beyondvc.com/2006/11/nintendo_wii_ra.html
http://www.beyondvc.com/2006/11/nintendo_wii_ra.html#commentsTue, 28 Nov 2006 20:26:03 +0000http://localhost/wp_beyond/?p=150James Surowiecki has a great article in the New Yorker this week about the new Nintendo Wii system, titled "In Praise of Third Place." What James really asks is if you are a distant third in a market, how do you compete with the big boys? In this case, Nintendo is slugging it out with Sony and Microsoft and rather than going into hand-to-hand combat, Nintendo has changed the game and the stakes - forget about being the most powerful and fastest machine but how about focusing on being the easiest to use with a significant differentiating feature - motion sensors. James goes on to say:

The point is that business is not a sporting event. Victory for one company doesn’t mean defeat for everyone else. Markets today are so big—the global video-game market is now close to thirty billion dollars—that companies can profit even when they’re not on top, as long as they aren’t desperately trying to get there. The key is to play to your strengths while recognizing your limitations. Nintendo knew that it could not compete with Microsoft and Sony in the quest to build the ultimate home-entertainment device. So it decided, with the Wii, to play a different game entirely.

I would argue that rather than title the article "In Praise of Third Place" that it should be titled "In Praise of First Place" because what Nintendo did was slice and dice the multi-billion dollar gaming market so that it could be first place in a submarket (which is quite huge) that Nintendo has defined, that plays to its strengths, and that it can win. This is a big deal and quite smart. Even though Nintendo is a large company fighting even larger ones, this is a strategy that any startup can use - change the stakes and be the best in your new category. This does not mean to slice ad infinitum until you get a market so small that it is irrelevant, but the point is that going into "hand-to-hand" combat with those with much greater resources can be quite hazardous to your health. Take a look at an excerpt from an earlier post I wrote about competing with the big boys.

First, as a startup you have to get away from a feature/function battle because you will always lose against a big boy. If a customer has already bought a product from an incumbent, they are more often than not willing to stay with that incumbent if they can deliver the extra feature/function soon enough in a good enough way. What I like startups to do is win with the product roadmap and vision. Show the prospect how you solve their needs today better than the incumbent but more importantly why you are different and how your approach will solve their future needs. If you can differentiate on this level, it gives you a much better chance to win.

]]>http://www.beyondvc.com/2006/11/nintendo_wii_ra.html/feed5Utility computing for the web and startupshttp://www.beyondvc.com/2006/11/utility_computi.html
http://www.beyondvc.com/2006/11/utility_computi.html#commentsFri, 03 Nov 2006 15:15:35 +0000http://localhost/wp_beyond/?p=159There is a great BusinessWeek article outlining Amazon's ambition to be a utility for web businesses. This reminds me of a conversation I had last month with a founder and former CTO of one our of our prior portfolio companies who said his goal was to have a highly successful SAAS play with 1 operations guy instead of 20. When I asked him how he would do it, he quite simply said Amazon - Amazon EC2 (Elastic Compute Cloud) and Amazon S3 for storage. Sure, I had heard about this before when Amazon launched it during the summer, but what really got me thinking was that here was a guy who had been there and done it - scaled a SAAS business to incredible numbers and he had been playing around with Amazon's infrastructure and was willing to offload a majority of his new startup's business on the Amazon infrastructure. When we talk about the commoditization of technology and how cheap it is to launch a new business on the web, we think open source and commodity servers. Now think about being able to launch a new web-based business and only paying for what you use. If it takes you awhile to scale you don't have to burn alot of capital upfront and only pay for minimal usage. If you are hugely successful, then you don't get caught with your pants down because you have the opportunity to quickly load a few more virtualized images on the Amazon EC2 infrastructure and pay more for that usage - bandwidth, storage, and compute time. Think about it - the upfront cost of starting a new web-based business if you went the Amazon route (when it is ready for primetime) has been driven down another order of magnitude as you can get started with little to no capital expenditures. The numbers are pretty incredible too - $0.15c per GB per month for storage or $150 per terabyte per month, $0.20c per GB for bandwidth, and the use of a pretty standard server (1.7Ghz x86 processor, 1.75GB of RAM, 160GB of local disk, and 250Mb/s of network bandwidth) for $0.10c per hour or $72 per server per month. Not too bad when you think that you can scale up or scale down pretty easily. It will be interesting to see how many startups look to use the Amazon infrastructure after it gets more publicized at the Web 2.0 conference. As a startup, your job is to allocate your scarce resources as efficiently as possible - time and money. If you can stretch either of these and give your company more of an opportunity to hit critical milestones or get better product out the door, then it is a huge win for you to spend your dollars on making that happen, rather than on capital equipment.]]>http://www.beyondvc.com/2006/11/utility_computi.html/feed2When competitors are acquired…Socialtext and Jotspothttp://www.beyondvc.com/2006/11/when_competitor.html
http://www.beyondvc.com/2006/11/when_competitor.html#commentsWed, 01 Nov 2006 09:49:20 +0000http://localhost/wp_beyond/?p=160In an earlier post titled "When Competitors are acquired" I discussed that rather than sulk and wish it were you who was bought, smart companies will go out and capitalize on the opportunity as their competition is temporarily distracted and inwardly focused on creating synergies. Rather than comment on the whys of the Google Jotspot deal, I would rather point out what smart competitors like Ross Mayfield of Socialtext are doing to capitalize on the deal. As mentioned in his blog post:

Socialtext, the first wiki company, announced today a free hosted wiki program for JotSpot customers following that company's acquisition by Google. Socialtext will migrate JotSpot wiki content and provide one year of Socialtext Professional hosted wiki service to any JotSpot customer who signs up by the end of November 2006. While most JotSpot customers are small-to-midsized businesses, this offer is extended to deployments of any size.

Who knows whether or not Ross' program will be ultimately successful but I certainly applaud his efforts for being aggressive and moving quickly on the deal. For what it is worth, I have used both services in the past and while Socialtext was certainly more powerful and flexible, I found Jotspot incredibly easy to use. As i have mentioned repeatedly, reducing the barrier or friction to usage is incredibly important on the web and can be a make or break issue for your business. As Ross says, while Socialtext (higher end) and Jotspot (lower end) are clearly going after different segments of the market, it seems that Jotspot's vision to go after the lower end and help the power user with an incredibly easy to use service won the day for Google, as it continues to expand its efforts to take on portions of Microsoft's business.

]]>http://www.beyondvc.com/2006/11/when_competitor.html/feed1Where are your sales boulders and how are you going to move them?http://www.beyondvc.com/2006/10/where_are_your_.html
http://www.beyondvc.com/2006/10/where_are_your_.html#commentsTue, 24 Oct 2006 09:40:23 +0000http://localhost/wp_beyond/?p=163I had 2 board meetings last week, and it seemed that we spent a fair amount of time digging into each company's sales process, understanding and mapping out each phase of the sales cycle from sales lead to to actual installed customer. Many times one can focus too narrowly and only look at a sales pipeline or customer conversion rate and spend too much time talking about the numbers - did we make or miss our quarter and did we grow our sales pipeline and by how much. While those are always imperative to look at, it is also important to dig beneath the surface and understand how you got from Point A to Point B and deconstruct each step of the sales process, figuring out the time and resources it takes to move each prospect through the sales cycle and get them to become a customer. As one of our marketing consultants, RIchard Currier, once said, one must look for the Big Boulders in the sales cycle, the point in the funnel where things seem to take too long or cost too much, and put programs in place to move them. Once you map and understand what it takes to convert a lead to a go/no go decision, it will become quite apparent where you and your company will need to focus its efforts to maximize sales and marketing efficiency, move the boulders, and minimize sales friction.

For example, in one portfolio company, as we dug deeper into the sales funnel, we clearly saw that there were two distinct types of customers - one with a very short sales cycle with more do it yourself implementation and another set with a longer sales cycle. The natural question you have to ask yourself is how do I put programs in place to reach the first group of sales prospects to increase my efficiency. One other huge boulder we found was that sales pilots were taking too long to get started. As we dissected the problem, we discovered that a large portion of this time sink was because it took too long for a customer to get the required hardware to run a pilot. In order to reduce the friction, we brought in our own appliances to minimize the time to pilot and also mapped out a plan to run sales pilots in an on-demand fashion with no installation onsite at all.

In another company, the boulders that we discussed were less a sales targeting issue but more of an implementation issue. While we had a great distribution deal with a partner, the conversion rates were not as high as we liked. To move this boulder, we spent plenty of time discussing how we could get our customers to use our service with as little friction as possible - in other words, how to get a customer using our service with 1-2 clicks instead of 5 - 6. This may sound trivial but trust me it is not. Reducing the barrier to usage can make the diifference between a huge win or a mediocre effort. This applies in both the enterprise and consumer world. Once again, it is quite important to deconstruct your sales cycle and look for those huge boulders and put programs in place to move them to create a more streamlined process.

]]>http://www.beyondvc.com/2006/10/where_are_your_.html/feed3Back to the basics – more questions for entrepreneurshttp://www.beyondvc.com/2006/10/back_to_the_bas.html
http://www.beyondvc.com/2006/10/back_to_the_bas.html#commentsTue, 17 Oct 2006 10:48:32 +0000http://localhost/wp_beyond/?p=164On the heels of my earlier post on questions "entrepreneurs should ask themselves," I got a flurry of emails from readers about other points that I did not address. Anyway, I strongly believe that we can sometimes get too enamored with our own technology and not do enough market assessment in the real world. Later this week, we are actually going to have a strategy review at one of my portfolio companies and these are the questions we are asking ourselves:

What is our unique value proposition to customers? Is it truly unique and differentiated (come on-we need to be brutally honest with ourselves here)? If not, how do we leverage our strengths to create a compelling value prop to customers?

Who do we want to be when we grow up? In this world, I strongly believe that one must put a stake in the ground and either go big, go niche, or go home. Which one are we and why?

Where is the market headed? What are the opportunities - are we a leader or follower? If we are a follower, how do we become a leader?

Given all of the above, what are we uniquely positioned to deliver given our strengths and weaknesses? What are the biggest threats that keep our company from delivering?

How are we going to reach that customer at the highest point of pain and in the most capital efficient manner?

As one of the entrepreneurs in the portfolio pointed out, some of these questions can be theoretical and murky and until you get a product out into the hands of customers or consumers, it may be hard to answer them. My perspective is that yes this is true, but you need to have few of these basic questions covered before going into the market and then with the data take a step back and refresh, rethink, and reload. In other words, you need to take market feedback to validate or invalidate some of your initial thinking and adapt. I know these are all basic questions but you would be surprised at how many people come in and have not put their mind to some of these questions.

]]>http://www.beyondvc.com/2006/10/back_to_the_bas.html/feed3Questions entrepreneurs should ask themselveshttp://www.beyondvc.com/2006/10/questions_to_as.html
http://www.beyondvc.com/2006/10/questions_to_as.html#commentsFri, 13 Oct 2006 06:53:50 +0000http://localhost/wp_beyond/?p=166Andy Sacks, CEO, of Judy's Book has an excellent post of what simple questions management can ask themselves to assess their current state of play. If you are an entrepreneur, I encourage reading his post and some of his follow up commentary (Andy's questions below).

What are the hardest problems in our current business approach - the market issues that we keep struggling with over and over?

What’s (surprisingly) easy about our business – the things that are working better than expected?

Where’s the parade? What major trends are we trying to get in front of with our business?

What would our business look like If we:

Stopped trying to do what’s hard,

Did more of the things that are easy, and

Made sure we were in front of the biggest parade we can find?

I think all too often management can get bogged down into day to day details and it is extremely important to take a step back every once in awhile and think a little more strategically about what you are trying to accomplish, where you are going, and how you are going to do it. It is hard to build a great company without answering these questions. The beauty of Andy's questions are that they are simple yet powerful. This reminds me of the good old SWOT analysis where management looks critically at their company and themselves to assess their strengths, weaknesses, opportunities, and threats. This is also a great discussion to have at the board level since having input from others who know your business quite well but are not involved in the daily hand-to-hand combat can be quite valuable.

]]>http://www.beyondvc.com/2006/10/questions_to_as.html/feed3Social shoppinghttp://www.beyondvc.com/2006/10/social_shopping.html
http://www.beyondvc.com/2006/10/social_shopping.html#commentsFri, 06 Oct 2006 11:57:00 +0000http://localhost/wp_beyond/?p=171I must admit that I have seen way too many social networking related plays that want to be the next MySpace of some niche market. When asked about monetization the standard answer is they have a much more focused audience than MySpace with highly targeted CPMs. Guess what, if MySpace is only monetizing a fraction of their visits, how can a tiny, little niche site scale to enough volume to make a meaningful business? In addition, who wants to sign up for multiple social networking platforms like MySpace, Facebook, and niche sites for politics, sports, etc. While there will always be a few dominant social networking sites, I firmly believe that we will see more and more social networking functionality get built and weaved into commerce sites and other ventures. One of the reasons why eBay and Amazon have done so well is because of their respective communities and the ratings that are created by their customers. Netflix does a great job as well by allowing you to sign up friends and track their recent movies and get recommendations based on your location.

The next step in this evolution of commerce will be social shopping or companies leveraging Citizen's Media (blogs, podcasts, videocasts, tagging) to drive commerce. According to Answers.com, "Social Shopping is based on the principles outlined in the wisdom of crowds where a large group of users can recommend products to each other and between them work out what to buy and which ones have the most buzz." I believe this is an interesting area that has not been fully tapped yet. At the root of it, people want to connect. Most people I know tend to check the Internet first to research a purchase and also ask friends for recommendations or reviews about products. The more inefficient a market is, the more opportunity there is to educate consumers and peers leveraging the web.

A great example is the wine market. I am certainly no wine connoisseur, but I have been trying to learn more about it over the last two years. Over time, I moved from an Excel spreadsheet to using the web to track some of my purchases and to learn more about each bottle. One of my favorite sites is Cellartracker. It leverages almost a wiki like concept so when I add a bottle of wine, it first searches its database to see if anyone else in the community has already input the data. If it does, I can easily add a bottle to my virtual cellar and if not, I can add the data myself. It already has over 3 million bottles of wines in its database so I did not have to do alot of work to get started. It also has community reviews built into each input of wine so you can get recommendations for other bottles and figure out what others that have the same bottle as you have in their wine cellar. The downside is that the UI is not the prettiest and the site may be too flexible for the average user. Cork'd is another example of social shopping - it allows you to catalog your wine, review and rate it, maintain a wish list, and subcribe to your friend's wine lists.

One of my favorite examples of leveraging citizen's media is Wine Library, which has one of the largest selection of wines and some of the best prices on the web. Gary Vaynerchuk, Director of Operations, really gets the web and has leveraged podcasts and videocasts to launch Wine Library TV, a wine video blog with daily updates. If you haven't checked it out, I suggest subscribing to his videocast and buying wine from his store. I just had dinner with Gary tonight and it really blows my mind to hear how he helped take a small, family owned wine retailer based in New Jersey and leveraged the Internet to create a powerful wine retailer. It is great to see Gary bring next generation web concepts to the under the radar world of wine retailing. He especially understands how content can and does drive commerce for his company. Every videocast drives sales and as you can see from his site, he has built a pretty loyal following in a short period of time. He has a pretty sizable subrscriber base and uses RSS, tagging, and comments effectively to build a community around his videocasts. Since Gary understands how powerful the web can be, I would not be surprised to see him becoming the Robert Parker for the web generation as he delivers his reviews and thoughts in a way that we get and can consume on the go on any device. The big difference will be that Gary can and will leverage the web and his community to rate the best wines versus relying solely on the fine taste of one person. When speaking with Gary, it is also quite interesting to hear him talk about Wine Library as a content and social networking site as much as an ecommerce player. In the future, Gary plans on delivering alot more functionality on his site allowing his users to instantly add any purchase to their own virtual wine cellar, take notes on the wine, and share recommendations with their friends or the public. In my mind, this is a great example of how powerful social networking and blogging concepts can be for ecommerce plays. It has allowed Gary to build a stronger brand, acquire new customers virally, improve his conversion rates from web marketing, sell more wine, and ultimately boost his profitability per new customer (lower acquisition costs + increased sales). Given some of these benefits, I truly believe that social shopping will become a big thing in the next few years.

]]>http://www.beyondvc.com/2006/10/social_shopping.html/feed16Revolutionary technology with evolutionary implementationhttp://www.beyondvc.com/2006/10/i_was_riding_on.html
http://www.beyondvc.com/2006/10/i_was_riding_on.html#commentsThu, 05 Oct 2006 21:28:36 +0000http://localhost/wp_beyond/?p=172I was riding on the train this morning and was talking to a friend about one of my fund's portfolio companies. She mentioned that the management team had done a great job during a recent sales presentation because instead of going for the "rip and replace" strategy, they went with the "co-exist" philosophy. Too often, entrepreneurs can get too enamored with their own technology and forget that the customer may not need every feature that you are offering today. In fact, while revolutionary technology and vision is great, what the customer may want is an evolutionary approach to implementation. What I am talking about here is reducing the friction in your sales process (See an earlier post on frictionless sales). Convincing a customer that your technology or product can coexist with an existing investment is a much lower barrier to sales than convincing them to "rip and replace" or "forklift upgrade" a significant prior investment. The sales prospect will have a hard enough time buying a product/service from an unproven startup, let alone ripping out an existing investment from a safe choice, a much larger public vendor. Once you land the customer, you will always have the chance to expand your footprint. That is why I continue to be enamored with SAAS and downloadable software because I believe that it is inherently a more efficient and cost effective way of selling and delivering a product or service. Granted, most of the initial target market opportunities will be the small/medium business market but I still firmly believe that this market is untapped and offers great upside.]]>http://www.beyondvc.com/2006/10/i_was_riding_on.html/feed0Live homework help for your kidshttp://www.beyondvc.com/2006/09/live_homework_h.html
http://www.beyondvc.com/2006/09/live_homework_h.html#commentsTue, 19 Sep 2006 18:05:00 +0000http://localhost/wp_beyond/?p=175Congratulations to George Cigale and his Tutor.com (full disclosure - portfolio company and my partner Dan DeWolf is on the board) team for the launch of their direct-to consumer service which offers live homework help and online tutoring. This is the culmination of a mission that George set out to realize over 8 years ago. What is most impressive to me is that while George's initial focus when he launched the service in 2000 was to go after the consumer market, he quickly recognized that consumers did not have the bandwidth (5% broadband penetration vs. 45% today) and the comfort level to purchase online tutoring sessions. So like any smart entrepreneur, George did an analysis and went to the where the money was, providing a service to state and local libraries to offer to their constituency. George's patience and foresight helped Tutor.com weather the nuclear storm and build a real business behind the scenes. Of course, timing is everything and George and his team have been waiting for the right time (TODAY) to offer a direct-to-consumer service which provides live homework help for students. As George says:

You may know that over the past five years, we have focused on working with libraries across the nation to help kids connect with a real live tutor for one-to-one help. We'll serve over 1 million students this year through our Live Homework Help programs in over 1,500 libraries in 40+ states, and we will continue working closely with libraries as we expand our offerings. 94% of students say they got the help they needed and would recommend the service to a friend, and lots of great news coverage about those programs at Tutor's Press Page.

No more waiting for your tutoring session next week or driving your child to a tutoring center. Tutor.com Direct allows a child to get the help they need every day, before small difficulties turn into significant learning problems.

I hope you'll try it, have your kids try it, and share it with friends and colleagues. You can use the code "GCLAUNCH1" to get your first two hours for $5. Plus a third hour free if you call us at 800-411-1970 and give us your feedback after trying the service.

Hidden in this promotion for you to try this service are some nuggets of wisdom, the most important of which is that as a startup you must be flexible, flexible enough to know when your go-to-market strategy is not working and that sometimes you have to change, change your business model, your product, or your pricing strategy in order to be successful.

]]>http://www.beyondvc.com/2006/09/live_homework_h.html/feed2Getting too big too fasthttp://www.beyondvc.com/2006/09/getting_too_big.html
http://www.beyondvc.com/2006/09/getting_too_big.html#commentsFri, 15 Sep 2006 13:51:16 +0000http://localhost/wp_beyond/?p=176I encourage you to read what Evan Williams has to say (courtesy of Gigaom) about some of the mistakes he made at Odeo. Evan is one of the founders of Blogger which he sold to Google and is also founder and CEO of Odeo, a podcasting company. He goes on to outline a number of mistakes that he has made as an entrepreneur such as not understanding who his customer was and wanted, starting off with too broad a market focus, and raising too much money too fast. It takes alot of guts to publicly tell the world that you screwed up and how you screwed up. More importantly, it seems that Evan has narrowed the company's focus and cut down some excess management to rightsize his business. As I have mentioned in a previous post, having too much money can be a curse and not a blessing. If you don't know who your customer is and what your customer wants and how you uniquely deliver that, no amount of money will help you answer those questions. As you know, the more money you raise, the bigger the expectations are for your business. If you raise too much too soon, you may feel extremely pressured to go big and broad too fast without really getting the basics down first. I am sure Evan is not the only CEO to have felt this pressure to run fast, even if he didn't ultimately know in which direction he was going. My only advice is that in the early days as your are experimenting and understanding your market and customer base, a smaller first round of capital may be a better bet for you as it forces you and your team to be resourceful and focused while better aligning investor expectations. ]]>http://www.beyondvc.com/2006/09/getting_too_big.html/feed1Add Startup Review to your blogrollhttp://www.beyondvc.com/2006/09/add_startup_rev.html
http://www.beyondvc.com/2006/09/add_startup_rev.html#commentsWed, 13 Sep 2006 15:16:05 +0000http://localhost/wp_beyond/?p=178Nisan Gabbay of Sierra Ventures recently contacted me with respect to his new blog, Startup Review. According to Nisan:

Startup Review will be a blog that profiles successful Internet start-ups in a case study format. The case studies will analyze the key factors that made the companies successful, with an emphasis on strategy and product decisions. Each case study will also have sections discussing launch strategy, exit analysis, and links to other good analysis on the company.

I don’t think that there is a good forum where people can discuss what made certain companies successful, particularly the less publicized success stories. Sure there are whole books written on companies like Google and eBay, but what about the more modest success stories in the $10M - $2B range? My goal is to highlight lessons learned from companies like Rent.com, HotorNot.com, or Greenfield Online.

I took a look at his site and he has some great posts on companies like MySpace. If you are interested in going more in-depth to understand how certain companies got off the ground and made it, I suggest subscribing to his site. As for my two cents, it would also be interesting for Nisan to dive deeper into some more high profile failures in the market so others can understand the many things that can go wrong in a business. I have found that digging into your failures and doing a post mortem on why your company lost a sale or a customer, partner, or employee can be more illuminating than just understanding why you succeed.

]]>http://www.beyondvc.com/2006/09/add_startup_rev.html/feed3Take care of the little thingshttp://www.beyondvc.com/2006/09/the_importance_.html
http://www.beyondvc.com/2006/09/the_importance_.html#commentsWed, 13 Sep 2006 07:11:00 +0000http://localhost/wp_beyond/?p=179As an entrepreneur, you are most likely spending most of your time building your product and getting it to market. in other words, you are focusing on the big picture which is what you should be doing. I do want to share with you a couple of anecdotes about not forgetting to take care of the little things - little things like keeping proper files and records. It is quite simple to overlook this aspect of your business but taking care of your company and keeping your house in order is easy to do, especially if you start from Day 1. Make sure your basic finances are in order and that all customer contracts, employment-related documents, financing paperwork, etc. is all stored properly and securely. Sure we have electronic copies of many of these items but real signatures are quite important.

Example #1: Your company is about to be sold and as the acquirer is doing due diligence it wants to make sure that there are no outstanding claims to the intellectual property of your company. In other words, the acquirer does not want to have an ex-employee or founder come after them once the transaction is completed. Well, this is easy to take care of, right? Typically most companies have their employees and particularly technical personnel sign an assignment of inventions and confidentiality contract where any product or patent developed while working for your company is owned by the company. So in order to satisfy the acquirer's needs, all your company has to do is find the signed documents for the key technical founders. Well, guess what - if you didn't keep proper records and don't have the signature, there are two options - the acquirer may walk or you have to go back and get another signature from an ex-employee. Good luck with that.

You are about to sell your company. 5 years ago, you and a technical co-founder conceived of the idea and launched the service. However, your technical co-founder decided to work full-time at another company and ended up just consulting with your startup post-funding. While this person may have signed an assignment of inventions agreement with you, he also signed one with his current employer. When you closed your first round of funding years ago, the lead investor did his diligence and found out that the technical co-founder's existing employer may have a right or may even own the startup's technology. After much debate, you secure a release from the technical co-founder's company stating that they have no claims to the technology. Fast forward 5 years - you are about to sell your company, you have switched lawyers twice, and the acquirer needs this release. You can't find the signature page. Guess what, you are going to have to go back to the technical co-founder's employer and get another release. I can pretty much guarantee you that it will cost you to make this happen.

The net net is to not forget about the little boring things like record keeping when you start your business because it may come back to bite you in the ass and cost you real dollars when you need a document or signature most.

]]>http://www.beyondvc.com/2006/09/the_importance_.html/feed1Facebook and product developmenthttp://www.beyondvc.com/2006/09/facebook_and_pr.html
http://www.beyondvc.com/2006/09/facebook_and_pr.html#commentsThu, 07 Sep 2006 09:32:43 +0000http://localhost/wp_beyond/?p=180While reading the Wall Street Journal this morning, the Facebook story caught my eye. Facebook has clearly built a huge community and is one of the leading social networks on the web. However, I was mystified about the backlash the company received about its new service allowing users to better keep track of their friends and what they are doing. On the surface it seems like the company was trying to make it easier for their users to keep track of their friends' whereabouts and online activities. However, it seems that there is a huge privacy backlash online (according to USA Today already 500k of 9.5mm members are against this) - I guess part of the lure of the Facebook that it was more of a closed network than MySpace. All that being said, I am mystified because I wonder what level of customer feedback the company solicited in rolling out its new service. Sure, the larger your audience is, the harder it is to make everyone happy. In addition, there are many factors that go into the release of a new product that includes fixing bugs, soliciting customer feedback, responding to competition, and adding new features that will maintain a company's technological lead in the market. According to the Wall Street Journal article today:

Ms. Deitch said Facebook's feedback from users comes in the form of emails to its customer-service email address, which the company's product-development team reviews weekly. But the company typically doesn't solicit feedback by showing features to users before launching them.

Facebook held an emergency meeting yesterday to plan its response to the backlash. Ms. Deitch said that the new features are "here to stay" but that staffers are discussing possible tweaks to appease users. She wouldn't say what those changes might be.

While you cannot solely develop based on what existing customers want because you may miss the next big opportunity, I thought the benefit of web-based software was that you could test and tweak very easily. If what Facebook's spokesperson says is true ("But the company typically doesn't solicit feedback by showing features to users before launching them"), I would suggest that they build some new release practices to maybe roll out a new feature to a subset of the population and gather feedback before having to deal with this maelstrom of negative publicity. Isn't that what a lot of the best web-based businesses already do? To be fair, Mark Zuckerberg has responded admirably and promptly to his community. However, he could have avoided this all in the first place if he tested the implementation of the new features with a small subset of his community and I am sure that he would have learned that balancing privacy may have been more important for his users than raw functionality. My advice to many startups (particularly web-based ones) - after internal QA, try testing new features with a small sample set to further refine and tweak before GA.

]]>http://www.beyondvc.com/2006/09/facebook_and_pr.html/feed4Hiring great talent (continued)http://www.beyondvc.com/2006/09/hiring_great_ta.html
http://www.beyondvc.com/2006/09/hiring_great_ta.html#commentsWed, 06 Sep 2006 11:29:00 +0000http://localhost/wp_beyond/?p=181As you know, talent is the lifeblood of any company. Given that, I have written a number of posts on hiring (see here and here). I recently saw Joel Sposky's (Joel on Software) post on hiring great developers and thought that I would share it with you. He makes a number of great points and I have extracted a few pearls of wisdom for you:

"The great software developers, indeed, the best people in every field, are quite simply never on the market."

"Numerically, great people are pretty rare, and they’re never on the job market, while incompetent people, even though they are just as rare, apply to thousands of jobs throughout their career."

Like any important process, hiring great people means that you and your company need to make it a priority and stay incredibly focused. In fact, hiring great people reminds me alot of finding great deals as a VC. At the end of the day, being proactive is key and leveraging your network to generate targeted and filtered deals or resumes will always create a higher yield than sitting back and waiting for the masses to come to you.

]]>http://www.beyondvc.com/2006/09/hiring_great_ta.html/feed3Why cash is kinghttp://www.beyondvc.com/2006/08/building_a_real.html
http://www.beyondvc.com/2006/08/building_a_real.html#commentsWed, 09 Aug 2006 15:53:28 +0000http://localhost/wp_beyond/?p=184Oftentimes I am asked what my plan for exit is when I invest in a company. Sure I have a plan when I invest, but it is impossible to predict the future. The best plan in my mind is to make sure that any company we invest in has a tremendous market opportunity with a real business model and high operating margins that can eventually generate real cash flow. As an entrepreneur, it is important to invest for the long term and not make short term decisions because you think you will be acquired (see an earlier post - Companies are bought and not sold). Ultimately what will give you the best chance for success is focusing on the things that you can control - building a real business with a real economic model that can generate cash from internal operations vs. through external financing. Yes, this is easier said than done, but when this happens you can do things like Bob Parsons, CEO of GoDaddy, recently did (via Techmeme)- pull his IPO. As he discusses in his blog post:

Why I decided to pull our IPO filing. You might ask, why, if Go Daddy’s situation has never been better, did I decide to pull our IPO filing? There are three reasons for doing so:

1. Market conditions2. The Quiet Period3. We don’t have to go public

Market Conditions. The state of the stock market for an IPO is as uncertain as it could be. In fact, the USA Today published an article that IPO stands for “Investor Pain Overload.” This is due, in large part, to the overall "bearishness" in the market.

Consider the situation from a global perspective and follow it all the way to Wall Street. We have war and escalating hostilities throughout the Middle East, with no end in sight. Oil prices are skyrocketing. Tech stocks, in particular, are once again taking a beating on Wall Street, due in part to some investment banks cutting their ratings on the U.S. technology sector. Rising interest rates have played a key factor. Their steady rise over recent months has put adverse pressure on stocks overall.

In a bit of irony, last week when the SEC informed us our filing was accepted as being ready-to-go, market conditions were a terrible mess. In fact, inflation worries, say analysts, are bleeding into the tech sector. For all these reasons, I liken the timing of us getting the ‘green light’ to a person being told his car is in perfect condition just before it’s about to be driven into a wall.

I don’t expect market conditions to correct themselves for sometime. I feel we owe it to ourselves to withdraw our filing until better and more stable times arrive

What if you were a cash cow and nobody noticed? This seems like an excellent time to address an issue that has bugged me since the moment we filed our S-1.

After we did our filing, I was surprised that not one journalist took the time to look at our cash flow statement to report our actual results. Instead, each and every one of them hastily reported that Go Daddy filed to do an IPO and that we had never turned a profit. Not one of them took the time to look at our cash flow statements to see that we generated significant operating cash flow during each reporting period.

The accounting method we are required to use. Because GoDaddy.com sells domain name registrations, we are required to use an accounting method that is ultra conservative.

So one of the principal reasons that Bob lists for pulling is that he doesn't have to go public because his company is a cash cow. When you print cash like GoDaddy, you can control your own destiny. While the company doesn't look profitable on an income statement perspective because GAAP requires GoDaddy to recognize a domain name registration over the effective period of registration, GoDaddy is in a wonderful cash position because it collects the cash upfront when someone buys the domain. This is quite similar to a lot of SAAS oriented businesses that may sign up customers for one year contracts and collect the cash today but recognize the revenue over the life of the contract. When these types of companies grow quickly GAAP numbers may not tell the full story. And as I am sure many entrepreneurs know, you can't spend GAAP Net Income but you can spend cash. As Bob Parson summarizes:

To date, Go Daddy has been completely self-funded –we have been cash flow positive since October 2001, and – whether anyone has noticed or not — continue to generate healthy cash flow from operations. We’ll manage just fine without the IPO money — thank you.

When in doubt, remember cash is king.

]]>http://www.beyondvc.com/2006/08/building_a_real.html/feed2The myth of the Rock Star CEOhttp://www.beyondvc.com/2006/08/the_myth_of_the.html
http://www.beyondvc.com/2006/08/the_myth_of_the.html#commentsSun, 06 Aug 2006 08:50:00 +0000http://localhost/wp_beyond/?p=185Attraction to fame is part of our culture. There are dozens of magazines, tv shows, and websites devoted too all things celebrity. This attraction to fame also extends to the business and tech world as well - bringing a household name to your company can instantly elevate the perceived status of your business. All that being said, I personally have a serious problem when anything related to fame creeps into personnel decisions for an early stage company. Too often, when doing a search for a CEO, I have heard the term "rock star" thrown about from many a venture capitalist and entrepreneur. I need a "rock star" CEO that can take us to the next level and bring instant credibility to my company. Trust me, I am all for bringing in a "rock star" executive to run a business but in my mind it all comes down to what one's definition of a "rock star" is. Is your "rock star" a big name and cover boy on a magazine, key note speaker at many a conference, and a person who happened to catch the Internet wave at the right time and translated that into tremendous financial success? Or is your "rock star" someone that is appropriate for your business, meets all of the job specs in your CEO target profile, possesses leadership skills and experience working at large and small companies helping launch new products into new markets successfully, and has the hunger and passion to work at your company.? If that candidate happens to meet both definitions of "rock star", then you are in great shape. However, if you are making a decision more because of the candidate's big name than you better think twice. I am not going to go into a full dialogue on the hiring process but I suggest seeing an earlier post where I discuss that coming up with the job specification or target profile is one of the most important things to do before emabarking on any search. Once again, the point I am making here is to not make a hiring decision just on the name of a person but to do it for all of the right reasons. A friend in LA once told me that one of the keys to success in his business was to not get starfu**ed. I suggest the same when it comes to hiring your next CEO or key executive. You are probably better off hiring the CEO who has lots to prove and who is going to be the next "rock star" than one who already is. ]]>http://www.beyondvc.com/2006/08/the_myth_of_the.html/feed4Reliving the bubblehttp://www.beyondvc.com/2006/07/reliving_the_bu.html
http://www.beyondvc.com/2006/07/reliving_the_bu.html#commentsSun, 23 Jul 2006 07:30:36 +0000http://localhost/wp_beyond/?p=188Fred Wilson has a great post on remembering the old wounds from the last bubble in 2000. In particular, he highlights the question that many of us have asked at board meetings - are we being too conservative or is it time to step on the gas a little. This is a vibrant area for discusssion - we never know the real answer as hindsight is 20/20 but it reminds me of a post I wrote back in March 2004 called Thoughts from PC Forum - going into attack mode. Here is a little excerpt:

The companies that survived this downturn were excellent at cutting costs, repositioning their products for new markets, and being resourceful and creative to survive. While these are some of the business principles I want my companies to continue to adhere to, I also want to caution that there is a danger in being too cheap. Some of these companies were so shellshocked from what happened during the past couple of years that they have become too cautious. For anyone that has been through the tough years, the only thing I can say is congratulations for surviving but now it is time to take some calculated risks. It is time to get out of the bunker and go into attack mode. Go after your competition, take some calculated risks, and focus on creating some revenue growth. What is different now than before is that most companies that survived the nuclear winter know who their customer is, how much they will pay, and what features and functionalities they may want in future versions. While it may sound like idle VC talk, I encourage you to spend that extra $$$ now as long as you can see the real ROI behind a targeted marketing program, the hiring of a new engineer to finish a product faster, or a new sales person to manage more qualified leads. Once again, take it with a grain of salt, as some entrepreneurs may think this is another VC swinging for the fences, but the point is don't be too cautious because the opportunity may just pass you by.

Trust me, having lived through the bubble has changed my mentality a ton but I always have to remember that there is that lingering fear in my mind (fear can be good), and that I also have to temper my psychological mindframe with the data we have at hand and the opportunity in front of us. In other words, have a strategy and stick to it and if anything remember that old wounds can haunt you and use the data at hand to help make your decision. If the ROI and return is there, test it out and try it as you never know until you take that step. There is a huge difference in building your company because your competitors are doing it versus building because it is the right thing for your company and the data suggests it. Underinvesting in your company is just as much a sin as overinvesting in it. So find the balance and continue building.

]]>http://www.beyondvc.com/2006/07/reliving_the_bu.html/feed3Software & Information Industry Association surveyhttp://www.beyondvc.com/2006/07/software_inform.html
http://www.beyondvc.com/2006/07/software_inform.html#commentsThu, 20 Jul 2006 13:18:09 +0000http://localhost/wp_beyond/?p=190It is always helpful to get benchmark data on your competitors and on other companies that have a similar business model. To that end, I encourage you to sign up for the SIIA Financial Survey to see how you stack up against your competitors.

We encourage you to invite your software industry portfolio companies to participate in the SIIA Software Industry Financial Survey, conducted with assistance from Deloitte & Touche LLP and its affiliates.

The report from this survey will provide in-depth analyses on nearly 100 financial statement and productivity ratios -- detail far beyond that available in annual reports or SEC filings. These include R&D, sales and marketing, legal, revenue per employee and inventory turnover, among others. Results will be shown by sales volume, market segment, ownership, profitability and other measures, allowing you to make appropriate peer comparisons.

I am sure this will be a worthwhile endeavor for you. When I meet an entrepreneur I always like to ask who they want to be when they grow up and why? In other words, I like to know what company out there today has a business model that you would like to emulate. While I do not pin my valuation for an early stage company on the financial model, it is important to have one to understand your costs or cash needs and to understand whether or not you have a viable business model with high gross margins or low gross margins. For example, if you are another social networking company that walks in my door wanting to be the next MySpace then you better understand that the only way to make that model work financially is to have a huge audience generating tons of page views since the monetization rates on each page view are so low relative to paid search as an example. If you are selling infrastructure software and you model out in 3 years that you will be more profitable than every other company out there, I am sure you are missing something as well.

]]>http://www.beyondvc.com/2006/07/software_inform.html/feed0When to hire a VP of Saleshttp://www.beyondvc.com/2006/07/when_to_hire_a_.html
http://www.beyondvc.com/2006/07/when_to_hire_a_.html#commentsThu, 06 Jul 2006 08:17:34 +0000http://localhost/wp_beyond/?p=195As I mention in an earlier post, companies evolve and need different types of management with different profiles as they grow. A clear kiss of death that I have seen more often than not is hiring a VP of Sales too early. Here is the typical scenario - you just signed 3 or 4 customers in a couple of different verticals and you feel that all you need is some bodies on the street to grow your business. On top of that, you figure that you want to hire the senior guy first so he can bring in his own troops. Hiring a VP of Sales too early can cost you dearly. Here are a few reasons why:

VPs of Sales need to make their comp. Typical salaries range from $150-200k plus performance equaling a total package of $300 to $350k. Most VPs of Sales will try to get you to guarantee the first year or at least the first couple quarters of compensation to offset the risk of working at such an early company.

All VPs need people to manage which means your VP of Sales will want to hire a bunch of reps to grow the business. The experieced enterprise direct sales reps will cost you $80-100k base plus performance of up to $150-175k total comp. Once again many of the best reps will want to get some guaranteed draw for at least a quarter or two to get started.

What ends up being a situation where you expect to bring on a performance-oriented sales team becomes one which many of your new hires get guaranteed comp for a couple quarters. The burn rate added to your company almost doubles overnight with these heavyweight sales guys with no leads to go after and no mature product to sell. In addition, over time the sales team will get frustrated if the product is not ready for primetime and they will be out looking for a new job in a couple of quarters making all of this effort a very expensive experiment. Hiring a VP of Sales is not a commitment to hire one guy, it is a commitment to bring on a team, one that will not be cheap. Before you make this commitment, make sure you are ready. As you can read from an earlier post, when you ramp your sales efforts is critical.

Do more with less and be careful of ramping up sales until you have a repeatable selling model. In other words do not hire too many sales people and send them on a wild goose chase until you have built the right product, honed the value proposition, identified a few target markets with pain, and can easily replicate the sales process and model from some of your customer wins.

Many of the best companies I have seen have taken the bootstrapped approach where the founders of the company act as the initial sales team to close a few deals, to learn about the customer, and further refine the product. Yes, this can only last so long as everyday out of the office or with customers means another day not developing the product. That being said, rather than hire a VP of Sales first, I would encourage you to focus on generating leads and hiring a sales rep or two to follow up on them. This way you can take a smaller step to refine your sales model and product before going big. Remember don't hire a VP of Sales to only have them hunting for dodo birds.

]]>http://www.beyondvc.com/2006/07/when_to_hire_a_.html/feed13Top-heavy teamshttp://www.beyondvc.com/2006/06/topheavy_teams.html
http://www.beyondvc.com/2006/06/topheavy_teams.html#commentsSat, 24 Jun 2006 09:36:10 +0000http://localhost/wp_beyond/?p=196I met with a 10 person company the other day and once I got to Slide 2, I immediately started having questions about the opportunity. What struck me was a company that had a CEO, COO, and a VP of Marketing and a VP of Sales. You have probably heard this many times before but I will reemphasize the point - companies have different personnel needs at different stages of development (start-up, first customer sales, rapid growth, maturity). It is also more costly to bring in the wrong hire then to wait to bring in the right hire. The entrepreneur was obviously quite proud of his team thinking that he would get over some major objections from investors. I, on the other hand, saw a startup that had too many chiefs and not enough indians. I also saw a team that probably did not have enough discipline to ask the tough questions and make difficult decisions. I mean why does a 10 person company need a CEO and a COO? As an early stage investor, I would rather have a company with a clean slate that we can build a team around rather than a fully-baked team when we don't necessarily know if the market is the right one to go after and if the product is the right product. When I fund an early stage company, I would typically rather have an entrepreneur that has product vision, a development team to execute around that, and the openness to build a team around him as the company grows. It can be death to have a top-heavy organization from Day 1 because startups change and change frequently during the early days. Don't lock yourself in with big salaries, big options, and big egos until you really know what market you are going after, the skills and experience you will need to win that market, and the product is ready for prime-time. In a future post, I will walk you through one of the biggest and costliest mistakes I have seen early stage companies make - hiring a VP of Sales too early.]]>http://www.beyondvc.com/2006/06/topheavy_teams.html/feed13Product pricing and gravityhttp://www.beyondvc.com/2006/06/product_pricing.html
http://www.beyondvc.com/2006/06/product_pricing.html#commentsThu, 15 Jun 2006 18:24:53 +0000http://localhost/wp_beyond/?p=198When you first release your product to the market, it is extremely important to think long and hard about product pricing. I can’t tell you how many meetings I have had where I have thought that companies were giving too much away for too cheap a price. Or they have given their product or service away for free which can be a great model but they had no plan to monetize in the future. When asked about pricing, I have at times heard a “we want to release it to the market and see what happens.” That can and does work great for testing a product and its features and building a user base, but when you do this, I would also hope that you have a plan for how you will monetize in the future. The allure of undercutting your competition and driving volume is a strong one, but one that can also be quite dangerous to your business. One rule that I have always believed in is that gravity takes over in product pricing. In other words, it is much harder to increase pricing (defy gravity) then it is to reduce the price of your product. The corollary is that it is much easier to reduce pricing then to increase it as customers feel like they are getting a good deal. Over the last twenty years, it is clear that technology buyers expect to get more for the same $ spent last year or to get the same product for less $ this year. This is applicable to consumer as well as enterprise-focused companies.

While I am no means an expert in product pricing, it is important to first analyze the competitive landscape, how your product fits in versus the competition, and then to figure out where you want to play in this market given your strengths and weaknesses. If there are no direct competitors, then look at some potential substitute products that customers are buying and figure out how your pricing looks relative to those companies. Once you get an understanding of the market dynamics, you should figure out how you want to enter the market vis a vis your pricing – do you have the most-feature rich set of services and want to charge the most or charge a similar price for more functionality or do you want to be the high volume-low cost provider. Finally, I would think about your product roadmap and determine if you can get to market aggressively, be different from your competition, and build a model around upselling new features and functionality. More often than not, I see companies not doing enough thinking on product pricing with the idea that they can always change it later on. In addition, many companies seem to err on the side of charging too little, rather than charging a little more with the opportunity to discount and drop or refine pricing down the line if sales do not ramp up as anticipated.

So when you release your product, remember that the laws of gravity take over in product pricing. If you are going to give a product away for free, have a plan to upsell or make money down the line with premium services or other functionality. Also remember that once a customer starts using a product or service that the last thing you ever want to do is take value away from your customer by increasing the price or beginning to charge for a service without adding new features and functionality. How you price your product at market release is not easy to undo in the future.

]]>http://www.beyondvc.com/2006/06/product_pricing.html/feed3Greenplum’s first reference customerhttp://www.beyondvc.com/2006/06/greenplums_firs.html
http://www.beyondvc.com/2006/06/greenplums_firs.html#commentsMon, 05 Jun 2006 15:13:22 +0000http://localhost/wp_beyond/?p=199Congratulations to Greenplum (full disclosure: portfolio company) as it announced its first referenceable customer, Frontier Airlines, last week. To refresh your memory, Greenplum develops software that allows customers to deploy terabyte scale datawarehouses leveraging PostgreSQL at significant price/performance advantages over exsiting solutions. Building credibility is an important step for startups and getting referenceable customers and hiring industry talent are two surefire ways to do that. Here is a quote from Robert Rapp, CIO of Frontier and former CIO of Southwest Airlines, from a Charles Babcock Information Week article:

Frontier CIO Robert Rapp says the airline's yield management process runs on Bizgres MPP. The system predicts the yield or profit that Frontier will receive on various flight combinations and ticket prices. The system helps Frontier determine where to offer seats at bargain prices and where to avoid what might turn out to be a competitive bloodletting, with no one profiting, says Rapp, the former CIO of Southwest Airlines, a pioneer of low-priced flights.

"Greenplum allowed us a very economical solution for a mid-sized airline. There are large amounts of parallelism in the system," says Rapp. A comparable but higher end commercial system used by retailers such as Wal-Mart comes from Teradata, a unit of NCR Corp. "Greenplum was available at 20-30 times less" than such a system."It was available at a very nice price point for us," adds Rapp.

Congrats to the Greenplum team on reaching this significant milestone and I am sure that this Frontier Airlines story is one that the company and I will be hearing about for a long time, in every sales presentation and pitch. As I have said before, it is important to make sure your first 5 customers are highly referenceable (extremely happy with your solution and influential in the community to get the market's attention) so you can significantly leverage those first relationships to establish market credibility and even help close some of your sales prospects.

]]>http://www.beyondvc.com/2006/06/greenplums_firs.html/feed0Don’t forget that vision thinghttp://www.beyondvc.com/2006/06/that_vision_thi.html
http://www.beyondvc.com/2006/06/that_vision_thi.html#commentsSat, 03 Jun 2006 08:31:13 +0000http://localhost/wp_beyond/?p=201I recently sat in a presentation which a portfolio company CEO gave for a potential strategic partner. He first started out with a two minute explanation of the business and then insisted on diving into the demo. I wasn't sure if that prospective partner really got it and before we knew it, the CEO said it was much easier to just dive into the demo to explain. I kind of cringed but did not want to stop him from giving the demo as I was hoping he would get to the big picture. While everyone was impressed with the demo, it lasted too long and got us focused in the weeds and not the forest. From that meeting, I was left with a deep understanding of the features and functionality but what was clearly lacking was the vision for the business. If you can't explain what you do, its context, and the opportunity in a few sentences and have to give a demo for someone to get it, I would suggest going back to the drawing board and thinking long and hard about how you make sense of what you do verbally. It would have been great if the CEO started the presentation with a clear and compelling message of the company (not the product) on where the world would be 5 years from now and how his product or service today would grow to meet this vision of the future.

As one of our marketing consultants, Richard Currier, has always told our portfolio companies, "you market the vision, and sell the product." If you get too locked into talking about a product, then your partner or customer gets stuck into thinking about who else does this and why are you different. Getting into a feature/fucntion battle in the first meeting is not a great way to start. Sure enough, our prospective partner started naming several companies asking us how we differed from them. If you start with a vision first and clearly talk about your view of the market in the future and how your product evolves from where it is today to a roadmap of the future, then it is easier to differentiate your company and bring the discussion to a higher level.

Trust me, the word vision became almost a dirty word during the market crash as no investor wanted to have another entrepreneur or CEO long on vision and short on execution. The problem is that the very skills that got us to the market hype (lots of vision, big thinking) were not the skills that enabled many of us to survive the downturn (tactical focus on generating revenue, conservative business plan, and execution). If I look at the world on a spectrum from focus on all revenue and profits on the one hand and all technology and vision on the other hand, I would like a mix tilted much towards the technology spectrum in the early stages of a company's growth. Pre-2000, I would argue that the mix was all tech and vision with no focus on building a business. Post-2000, many companies were much more on the business spectrum and less on the tech side. Today, I am asking that entrepreneurs bring back that vision thing and show us the big picture because showing me a point product doesn't cut it. In addition, in today's world it is much harder to get public and many of the acquisitions today are not based on how many customers you have or revenue but based on your technology today and product vision in the future. I have a number of companies being looked at right now and having a 2 year advantage on a product can mean alot for a strategic partner or acquirer. I am by no means advocating that you build a company to flip, but I am just stressing that vision is not a dirty word, that you need one, and that as long as you carefully balance that with building a real business you will be in great shape.

]]>http://www.beyondvc.com/2006/06/that_vision_thi.html/feed9Kinnernet 2006 – geek camphttp://www.beyondvc.com/2006/04/kinnernet_2006.html
http://www.beyondvc.com/2006/04/kinnernet_2006.html#commentsMon, 03 Apr 2006 15:57:00 +0000http://localhost/wp_beyond/?p=210I just got back from a week in Israel having spent some time in Jerusalem for an Answers board meeting and then making my way to the Ohalo Resort on the Sea of Galilee for Kinnernet 2006. Kinnernet is a techie geek camp organized and run by Yossi Vardi (cofounder of ICQ). At Kinnernet, I had the privilege to spend time with some great people from Israel, Europe, and the US. I suggest checking out Jeff Pulver's blog and going to Flickr and searching for Kinnernet2006 for pictures and more thoughts on Kinnernet. There were lots of robots, aerial shows with model planes and helicopters, great discussions on current technology trends, and of course, plenty of beer and laughs.

One of the discussion groups that I led with Simon Levene (heads up Corp Dev in Europe for Yahoo and Yair Goldfinger (founder and CTO of ICQ and Dotomi) was titled "Are Internet VCs Dead." You know the backdrop - it costs less to get a company started and to generate users and Google and Yahoo are agressively snapping up companies before VC rounds. Google's expertise seems to be buying engineers, many times before a product is even launched. Yahoo, on the other hand, prefers to buy companies that have some nice user base, maybe no revenue model yet, but also before a VC round. The last point is that companies are now more capital efficient (see an earlier blog post) where $10-15mm can get a company to cash flow breakeven vs. $30mm. So what do VCs that invest in Internet companies do? Before I go there, I would flip the question and ask what do entrepreneurs do? From my perspective, I wouldn't take in more than $1-2mm to get my company started with a developed product and an idea of what usage will look like. At that point, as Yair suggests, it is decision time. Some of the questions to ask include:

1. Do I have a product or feature or can I build a real company (i.e., a growing cash flow sustaining business)? 2. What is the risk I face in building a company for the long term vs. selling today. 3. And finally, do the math - if I take in VC money I will clearly have to sell for alot more tomorrow than what I sell for today in order to generate the same or greater value.4. Do I want to do it?

As a VC, I truly would not want to invest in a company that has not thought about all of the above with a founding team that is fully behind building out the company for a longer term play. All that being said, the numbers are still against the entrepreneur. While there have been a number of acquisitions in the past year, it is still a fraction of the number of companies started. Since it is so cheap to start a business, you can have anywhere from 5-10 companies out there in each category. In addition, it is not clear that many of the acqusitions during the past year could have built real businesses rather than being a feature of a much larger entity. While the math worked for a number of enterpreneurs that sold, one of the decisions you need to make is the likelihood and timing of being crushed by a larger player if you decide to go alone and raise VC funding. Whatever you start, I would suggest thinking about what your potential revenue model is from day 1 and thinking through the economics. Hell, it may change a couple of times, but building a company with the sole purpose of flipping is the wrong idea as your odds of success are very low.

Despite this, the opportunity for entrepeneurs and VCs could not be greater. There are clearly more users globally, broadband is everywhere, users are more educated, companies can target more, capital efficiency has increased, and there are real business models out there generating tons of profits. I do not think that Internet VCs are dead, but rather, need to reinvent themselves. It is also clear that the VC model is broken and needs to change. As you can see this is slowly starting to happen as smaller funds ($200mm vs $750mm) are being raised, VCs are doing less new deals per year and sitting on less boards, and many are trying to get in earlier. Having a smaller, more focused fund allows a VC to make some investments during the Angel round ($500k-$1mm), watch the company closely, and give VCs the opportunity to lead the first real institutional round. If the company has the chance to flip, then great, everyone wins. If the company want to take the next step, then we can be there to lead or co-lead the next funding round. It is imperative for VCs to get in early and structure their funds around this because in the Internet space companies can build momentum quite quickly which also means that valuations tend to move quickly as well. That is also why the Googles and Yahoos of the world are trying to identify the emerging opportunities before the VCs get involved.

All in all, it was a wonderful time, and I feel honored to have been one of Yossi's guests and for having had the opportunity to network and participate with Israel's tech elite. Unfortunately, I had to head home on a redye Saturday night, but many of the attendees ventured to the Marker Tech Conference where 3500 people were expected to attend and hear panel discussions led by many of the participants at Yossi's Kinnernet. Kinnernet was great and I had a blast, made many new friends, and came away clearly impressed with Israel's thriving and talented startup community.

]]>http://www.beyondvc.com/2006/04/kinnernet_2006.html/feed1Eat when dinner is servedhttp://www.beyondvc.com/2006/03/preemptive_fina.html
http://www.beyondvc.com/2006/03/preemptive_fina.html#commentsMon, 20 Mar 2006 14:18:00 +0000http://localhost/wp_beyond/?p=213There is an article in the Wall Street Journal (sorry-requires subscription) today on pre-emptive financings or financings that happen when a company is not actually looking for capital. It is common wisdom amongst the investment community for entrepreneurs to "eat when dinner is being served." In other words, companies should take cash even if they don't really need it because you never know when the next meal will be served. This can be great for a company because it can provide a nice cash cushion for the operations, allow a company to spend real time with a potential investor, and help them avoid spending too many cycles on financing down the road. The article also points out that this is a new trend not unlike one that happened during the bubble period. To be honest with you, I don't see this as a new trend and a negative thing for VCs to do. It is a VC's job to find the best investment opportunities which means being proactive about generating deal flow and not sitting back waiting for new deals to come to us. Being proactive about new deals means spending time with entrepreneurs before they need money, staying in dialogue with them as they grow their business, and helping lead discussions on the next round of financing.

Being an early stage investor, I have played on both sides of the fence. I have been on boards where we have been approached preemptively by other investors. In those cases, it is helpful to think about two points:

1. Valuation isn't everything - sure, you want to take cash at a good price but if you take too much cash at too high a price too early, it builds unrealistic expectations for you, your company, your existing investor, and your new investors. You may end up chasing too many different opportunities, losing focus, and having a fractured board because of these lofty expectations.2. Having too much cash can be a curse and not a blessing - speaks for itself (see my last post)

On the other side of the fence, it is important for us proactive VCs to maintain our discipline, value the opportunity fairly, and really understand and work with the company to determine how the money will be used. In addition, we need to be careful about helping our companies use their bullets on the right opportunities and not every opportunity. Let's not forget the lessons learned during the bubble where companies with too much cash just crashed, burned, and died faster and more spectacularly than ones with less cash. In general, pre-emptive financings can be a great thing for both VCs and entrepreneurs, but we must be careful about managing expectations and staying focused.

]]>http://www.beyondvc.com/2006/03/preemptive_fina.html/feed3Advisory Boardshttp://www.beyondvc.com/2006/03/advisory_boards.html
http://www.beyondvc.com/2006/03/advisory_boards.html#commentsTue, 14 Mar 2006 10:44:15 +0000http://localhost/wp_beyond/?p=214I can't tell you how many companies come in and present and inevitably, somewhere in the deck, is a list of advisors. Of course, as I dig in to understand what these advisors actually do for the company, 9 times out of 10 they are just high profile names that are thrown on a list to give a company a stamp of approval. Trust me, I am all for advisory boards. In fact, many of my portfolio companies have them. Many entrepreneurs or management team put together advisory boards to get real expertise on product direction, the market, and to expand their network to reach new customers and partners. Advisory boards can be especially great because the typical relationship is usually noncash and compensation is based on options which vest over a period of time. So the cash-hungry startup can add talent and help without breaking the bank. However, like any business relationship, it is important to figure out what you want from each advisor, what their time commitment and interest level really is, and then structure the appropriate role and responsibilities. I, like most VCs, am more impressed with companies that have advisory boards that are structured and actually do real work for the company versus seeing just another list of names.]]>http://www.beyondvc.com/2006/03/advisory_boards.html/feed4Having too much money can be a curse, not a blessinghttp://www.beyondvc.com/2006/03/money_does_not_.html
http://www.beyondvc.com/2006/03/money_does_not_.html#commentsWed, 01 Mar 2006 12:31:00 +0000http://localhost/wp_beyond/?p=216Trust me, I love having well capitalized companies. However, having too much money can be a curse, not a blessing. More often than not, I see management lose financial discipline and avoid making hard decisions when capital is abundant and not scarce. To many executives, money does solve all problems. And yes, having money allows an entrepreneur to do many things with his business like hire more talent, scale the back-end infrastructure, and ramp up sales and marketing. On the other hand, when an entrepreneur has too much money, the tendency is to throw more money to fix a problem. Sales are not ramping up quickly enough so let's hire more sales people. Marketing is not generating enough leads so let's spend more money on lead generation. Engineering keeps missing its product release date so let's hire more engineers. And what happens is that more money gets poured in and that only exacerbates the problem as management never really spends the time to dig deep to understand what the underlying issue is and to fix it at the source rather than layer on more resources. In other words, an entrepreneur only hastens his downward spiral by spending more money on an inefficient business strategy.

On the flip side, I have seen many an entrepreneur create successful businesses who some could argue were slightly cash-starved. I am not arguing for entrepreneurs to starve their companies of the resources they need, but what I am suggesting is that having too much money can make one lose their creativity in terms of allocating scarce resources to grow a business. This is especially quite important during the early stages of company development. An entrepreneur needs to experiment with various ways to reach his target market, generate revenue, and develop product. An entrepreneur also needs to stay focused, disciplined, and make hard decisions in terms of where to focus company resources. Too much capital can kill this need. Throwing too much money at the wrong strategy or too many different areas only adds fuel to the fire. While money can really help an entrepreneur scale a business, having too much can be a curse.

]]>http://www.beyondvc.com/2006/03/money_does_not_.html/feed9What are the key drivers of your business?http://www.beyondvc.com/2006/02/wheres_your_das.html
http://www.beyondvc.com/2006/02/wheres_your_das.html#commentsSat, 11 Feb 2006 08:48:32 +0000http://localhost/wp_beyond/?p=218Scott Maxwell has another excellent post on his blog. This time it is on a company's need to measure and monitor their business. In an early stage business, I typically see two types of companies. There are those companies that do not measure and monitor much and instead drive their business by a "seat of the pants" decision making process. Other companies manage and monitor everything. The key is not to get stuck in the weeds and get paralyzed by analyzing too much data. For all of my portfolio companies, I like to know what the 4-5 key drivers of the business are. I like to know what leading indicators are most likely to show an increase or decrease in sales 1-2 quarters ahead and what the company is doing to improve those measures.

For example, when I was reviewing a financial model with a portfolio company which generated revenue through advertising it was clear that while traffic was a huge ingredient in revenue generation, RPM was an even stronger metric as each change in RPM significantly drove sales. Over the next month, we experimented with a number of changes (of course we measured and monitored each change against the benchmark) to determine how to finetune RPM. Why spend more dollars on getting more traffic to our site when we were not effectively monetizing in the first place? Finetuning our RPM is an ongoing process but now for each dollar we spend on generating traffic, I am confident that it will return much more than a dollar in revenue to the company. Metrics matter and understanding what inputs have significant leverage on your operating model is the key.

Yes, I know it is hard for early stage companies to accurately predict their revenue. But from my perspective, the financial model is not as important for accurate revenue prediction as it is for understanding how the economics of your business works. Does each new customer make money or lose money for you? In any financial model there are usually a handful of inputs that drive the overall sales and cost equation. Make sure you know what they are, how sensitive your revenue and costs are to that input (in the earlier example, traffic was a key input but RPM had a more direct impact on sales), and measure, monitor, and finetune your company based on these important pieces of data.

I was at a board meeting the other day and while we were pleased with the results for the quarter, we were struggling to understand why we were not getting more customers if we were winning a majority of our proof of concepts (POCs). As we dug through the data we discovered that while we did convert a majority of our POCs, 50% of POCs ended up in no decision. In other words, we wasted half of our sales engineering resources on sales that would never happen. The key was to go after the low hanging fruit first - only do POCs that can convert into a sale. So what have we done to correct this? We now require a more detailed checklist before a sales rep can request a POC for a customer. Even if we are able to reduce the no decision rate from 50% to 35% this means more sales. Clearly this does not mean we need to hire more sales engineering bodies as we can better utilize who we already have.

It doesn't matter if you are an enterprise, web 2.0, or old economy company because everyone must understand the key drivers of their business, measure them, and finetune their operations to run as efficiently as possible!

]]>http://www.beyondvc.com/2006/02/wheres_your_das.html/feed4Successful offshore practices – let them work on your crown jewels!http://www.beyondvc.com/2006/01/successful_offs.html
http://www.beyondvc.com/2006/01/successful_offs.html#commentsTue, 31 Jan 2006 22:07:21 +0000http://localhost/wp_beyond/?p=220The buzz around offshoring has certainly died down over the last year. For a period of time, you could not pick up a magazine or read a newspaper without a lead article on the dangers of offshoring. I had dinner tonight with a portfolio company CEO who has managed to shift most of his resources to India. Today the company has almost 100 employees in India, over 30 of whom have been with the company for 5+ years. Even more impressive is that the employee churn has been pretty low. When I asked him about the secret of success, he said it was quite easy.

"Let them work on your crown jewels."

In other words, most software development opportunities are with consulting firms where employees work on a project basis. So these jobs are usually fleeting and never last very long. Other software jobs are body-for-hire which, once again, is not that interesting and does not provide real upside for the developer. Many of the better opportunities have developers maintaining existing code, fixing bugs, and doing low-level programming. By making a strategic decision early to let the developers in India work on the core technology this company has been able to thrive and prosper and turn its offshore team into a real strength. All of the main architecture and design is still done in the US, but all of the development is done offshore. The other reason why this has worked so well is because the company also made a conscious decision to send over our existing VP Engineering and a few other key developers to seed and build the team in India. It is a wholly owned subsidiary and the employees all work for the company. The startup costs are obviously higher to do this but if you are looking to do offshore development and do it successfully I seriously urge you to consider building your own team if you can find the right lead project/eng. development manager. I have seen way too many companies fail in offshore development trying to just work with consulting firms as inevitably the churn and training costs end up being quite high. In addition, to make it really work, let your team build real product, work on new technology, and not just maintain old code.

]]>http://www.beyondvc.com/2006/01/successful_offs.html/feed6Favorite Quoteshttp://www.beyondvc.com/2006/01/favorite_quotes.html
http://www.beyondvc.com/2006/01/favorite_quotes.html#commentsThu, 26 Jan 2006 09:51:43 +0000http://localhost/wp_beyond/?p=222Today is Wayne Gretzky's birthday, the greatest hockey player of all time. Anyway, as I was looking at Today's Highlights from Answers.com, I was reminded of a couple of my favorite quotes from him:

"You miss 100% of the shots you don't take.""A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be."

If you have read my blog in the past, I am sure you can understand why I love them so much. They are apropos for not only sports but business and life in general. Read them one more time, think about them, and figure out how it might apply to what you have not done or what you want to do!

]]>http://www.beyondvc.com/2006/01/favorite_quotes.html/feed1Where’s your plan to manage your most important asset, your team?http://www.beyondvc.com/2006/01/gearing_up_for_.html
http://www.beyondvc.com/2006/01/gearing_up_for_.html#commentsMon, 02 Jan 2006 10:10:55 +0000http://localhost/wp_beyond/?p=225I remember when I first got into this business over 10 years ago and one of my partners told me that the secret to success is about the people, not about the technology. All too often we are enamored with how cool or sexy a technology is, invest lots of dollars to create that killer product, and sometimes forget that it is all about the people. We spend lots of time on product development plans, sales plans, and financial models and not enough time preparing and thinking about how to continue to motivate and inspire your team. When your assets go up and down the elevator everyday you must constantly remind yourself that you need to care for that asset if you ever want to have that killer product. The end of the year is always a great time to reassess and plan for the next one. As I spent the week before the holidays on a few compensation committee calls, I thought I would share with you some of my philosophy on compensation and how to take care of that ever precious asset, your employees.

From a philosophical point of view, I view compensation as the combination of salary, bonus (if any), and equity. For cash starved startups, having management and employees believing in the opportunity and team and being motivated by equity is key to success. From a cash perspective, you have to pay market to slightly above market rates to attract good people, but I prefer to see the employees with above market equity compensation packages to align interests. You never want anyone worrying about paying their mortgage but at the same time, given similar backgrounds, I prefer the employee who will take less cash and a higher equity package.

The next question you may have is what is the definition of market. On a public company board, for example, I look at other companies that we compete with and other businesses that are in a similar stage of revenue growth and financial numbers. On a private company board, there are surveys out there that you can get a hold of that outline compensation for different positions based on venture capital raised, geography, stage of company, and revenue. None of these numbers are scientific but they certainly help you ballpark market compensation. Of course, any active venture capitalist can look into their existing portfolio of companies to determine what market really is. Taken together, you must decide if you want to pay market, below market, or above market compensation. As I mention above, I like to pay above market on equity and at market or slightly above market on cash compensation. Of course, there are certain cases where you have to be flexible and pay up for the right person.

In terms of bonuses, I am not a huge fan of cash bonuses for companies losing money, especially in the early stages of development. As a company matures and hires additional executive talent cash bonuses become more important to retain top level executives. With respect to bonuses, there are no guaranteed bonuses, only performance-based ones. In addition, I prefer a performance-based bonus over just paying an executive more salary. As far as bonuses are concerned, it is really important to have clearly defined goals and metrics to measure performance and subsequently pay out cash. For most of the key management, I like to tie much of the bonus number 70-100% (depending on which function) to overall company numbers like revenue goals, number of new customers signed, and cash balance related numbers. These metrics should be simple Yes/No metrics - it should be quite clear if someone realized their goal or not. Of course, these metrics depend on the stage of company and predictability of the future, but overall it is good to see all of management working together as a team, succeeding or failing together on overall company goals versus measuring performance against individual MBOs. Of course, this means having a clearly defined budget that is put together and agreed to by all stakeholders including management and the board. This must be put in place by the end of the prior year so you are ready to measure and manage performance for the new year.

As I look to the new year, it is important to have an option forecast just like any financial forecast. In order to do so, you should have a general range of options that you will give to each employee based on their level such as staff, manager, director, VP, etc. so that each employee at each level is relatively the same. The range is to obviously give a little more or less to a certain level employee based on performance and other factors. From a company perspective, you then look at your hiring needs for the year, put in the number of estimated options for each employee, and you have just created your option forecast for the year. These compensation bands are important as your employees talk to each other, and whether you like it or not, employees end up knowing how much each person makes and what their equity package is. In fact, I have seen several instances of VPs asking for salaries and bonuses similar to their peers out of respect. This is obviously how I do not want to compensate employees as each function adds a different level of value and each VP starts out at a different time in a company's life. That being said, it usually becomes an issue at some point in time so it is imperative to have a total compensation range for each level of employee and to avoid paying someone total compensation that is completely out of range and non-market.

This is just a general framework, and there will always be one-off adjustments to be made. For example, throughout the year I like management to let us know of any "at-risk" employees that may need some adjustment to their overall compensation numbers. In addition, we also need to know about which employees we should be proactive about and move their compensation to the higher end of a salary range to further incent them. Finally, I like to know about any key performers or herculean efforts that should be rewarded with some additional performance-based options. If you can take care of all of these issues in one fell swoop at the end of the year that is best from a governance perspective. However, depending on the situation, you may have to act swiftly as circumstances can force you to do otherwise.

Finally, and most importantly, there is more to making your people happy beyond the monetary compensation. As I wrote in an earlier post, A Players like to work with other A Players. To the extent that you have a strong team and every hire is better than the next, I can guarantee that you will attract some great talent. A Players like to learn from other A Players and like to know that when their backs are against the wall, they have other team members with the experience and know-how to persevere. In an employee's mind, the more A Players means the more likely that the company will succeed and create some real equity value. In addition, people like to work on exciting projects in a dynamic, lively atmosphere. There is a big difference working in an environment with team members who are passionate about the product and success of the company versus employees who are happy to go through the motions.

The bottom line is that you have to take care of your number one asset, your team, and start preparing early in the year to make sure that you have the right plan in place to keep your team motivated and excited to work at your company. This includes managing compensation proactively but also making sure you hire the right people and create a winning, passionate atmosphere in which your team can thrive.

]]>http://www.beyondvc.com/2006/01/gearing_up_for_.html/feed9Thoughts from a recent CIO dinnerhttp://www.beyondvc.com/2005/12/thoughts_from_a.html
http://www.beyondvc.com/2005/12/thoughts_from_a.html#commentsThu, 15 Dec 2005 17:10:04 +0000http://localhost/wp_beyond/?p=227One of our advisors for our fund hosted a New York CIO dinner last night. It was a gathering of 30-40 of some of New York's leading technology buyers, mostly from the financial services industry. As a VC, it was quite interesting to hear about the state of technology spending and what is top of mind for many of these players. Repeatedly I heard about grid computing, security, and service oriented architectures. It seems to me that all of the Gartner hype put into these technologies years ago are slowly becoming a reality. As for startups, not many were mentioned, and most of the technology buyers said your best bet was coming in through a larger partner whether it be a Sun, Cisco, HP, or IBM. In addition, it was quite clear that this was a small community, and like any small community, they all talk with each other and want to know what technologies their peers are using. So lesson #1 is while it is always hard to land your first financial services customer, remember not to screw it up because if you do everyone will know. On the other hand if you deliver on your promises and have a great base of early reference customers, it will pay huge dividends.

During dinner, one of the CIOs reminded me of the difficulty of startups selling into his organization. First, when you think of IT budgets, you have to remember that about 60% is spent on people, 20% on hardware, and 20% on software. In the software bucket, much of this money is spent on software maintenance and relationships with existing vendors. While the remaining small % of spend leaves room for new license spending, only a fraction of that will be even available for early stage companies. Lesson #2 is that it is important to understand the culture of each financial institution with respect to their reputation of being an early adopter, fast follower, or mainstream player. For example, someone from Citi told me that if he were a startup he wouldn't even bother selling into Citi as it takes an incredibly long time and you could die trying. Ditto on Bank of New York as their business is about settling the trillions of dollars of cash transactions daily. Nothing innovative they really need to do here except scale and reliability. BONY gets no points for taking on sexy technology or more risk. On the other hand, investment banking and trading heavy financial services companies will take a look at new technology to get a leg up on the competition.

Lesson #3, if you sell into a large financial services player, either be well networked, come in through a partner, enter from the bottom up, or go to revenue generating groups with money and buying power. On the top down approach it is all about having credibility. No one wants to be the first, especially if your technology doesn't work. On the well networked side, get a reputable CIO to believe in you and your service, get them your board or advisory board, and have them make a few calls their technology friends to open up some doors. With respect to working with partners this can be many times more difficult than landing a large customer. I would not waste your time with a partner unless you have a number of solid customers and can show the partner how they are going to make money and lots of it. Finally, entering from the bottom up means staying away from the CIO's office, offering free downloads, for example, where the actual workers can bring software into the enterprise from the worker-bee level. This takes time but can be doable. Finally, if you have the right product and reach the right person in the revenue generating departments, not IT, and show them how they are going to differentiate themselves from the competition and make more money with your product and service, you can avoid being put in the IT bucket all together. What does this mean for me? I wouldn't bet the farm on selling to these guys unless you have a team that knows the space cold, is well networked with peers who have budget authority to get the early customers and traction, and unless you are well prepared for long sales cycles. It is damn hard to break into the clique, but if you do it can be quite rewarding.

]]>http://www.beyondvc.com/2005/12/thoughts_from_a.html/feed3Frictionless sales (continued)http://www.beyondvc.com/2005/12/frictionless_sa_1.html
http://www.beyondvc.com/2005/12/frictionless_sa_1.html#commentsWed, 07 Dec 2005 17:17:22 +0000http://localhost/wp_beyond/?p=229I would even apply this frictionless sales model to the consumer web. We all know that the Internet is turning every media company upside down about worries of cannabalizing their existing business. It is clear that CBS gets it as they just announced that March Madness will be delivered free over the Internet. CBS will monetize it with ads. CBS is going open and understands this could potentially create new and additive revenue models, not less. Kudos to Larry Kramer for making this happen. Larry and I are on a board together and I look for more innovative and forward thinking ideas from Larry as he helps CBS embrace the web, not fear it. Think about the millions of users who will go watch the March Madness online and check for scores. Think about all of the cross promotion of new television shows on CBS, the additional ad revenue, and the general brand awareness that CBS will build from this. On the other hand, I was on the CNN site and saw this. Why would I pay $3 a month or $25 a year for CNN on the Internet when I can get it for free on the television? If you are a media company, go the CBS route and figure out how the web will help your business, not kill it. Be innovative, reduce the barrier to adoption for your customer, and figure out how to monetize your audience. Add more features, add community so your users can interact with one another, and leverage the web and its interactive, two-way nature. Don't just deliver me programming on the web and charge me for it.]]>http://www.beyondvc.com/2005/12/frictionless_sa_1.html/feed1Frictionless Sales (continued)http://www.beyondvc.com/2005/12/frictionless_sa.html
http://www.beyondvc.com/2005/12/frictionless_sa.html#commentsWed, 07 Dec 2005 16:27:38 +0000http://localhost/wp_beyond/?p=230As you know, I am enamored by frictionless sales. Frictionless sales means reducing the pain for customers to adopt and use a service/product and consequently reducing the cost of sales and marketing to get a customer and generate revenue. As I mention in an earlier post, "The less friction you have in your sales and delivery model, the easier it is to scale. The easier it is to scale the faster and more efficiently you can grow." The lowest friction sale can be a user clicking on a web page and the content owner getting paid for it. The highest friction sale is spending lots of money on marketing and trade shows and having a large, direct sales force of expensive reps pounding the pavement for months trying to close a large deal with an enterprise customer. Follow that with a 3 month implementation process to get the customer happy. There are various grades of friction between these two extreme points like open source business models, software as a service, and reseller/OEM-type models as other forms of packaging and delivering a product/service. And of course, each of these models requires a different methodology and way of marketing and selling to a customer. Ultimately what you want is sales leverage where every $1 you spend on sales and marketing equals multiples of that in terms of revenue. Jonathan Schwartz has a great post on why Sun went open source and why free does not mean less revenue but more revenue.

Opening up the Solaris Enterprise System, and giving it away for free, lowers the barrier to finding those opportunities. Free software creates volumes that lead the demand for deployments - which generate license and support revenues just as they did before the products were free. Free software grows revenue opportunities.

Opening up Solaris and giving it away for free has led to the single largest wave of adoption Solaris has ever seen - some 3.4 million licenses since February this year (most on HP, curiously). It's been combined with the single largest expansion in its revenue base. I believe the same will apply to the Java Enterprise System, its identity management and business integration suites specifically. Why?

Because no Fortune 2000 customer on earth is going to run the heart of their enterprise with products that don't have someone's home number on the other end. And no developer or developing nation, presented with an equivalent or better free and open source product, is going to opt for a proprietary alternative.

Those two points are the market's reality. And having reviewed them today at length at a customer conference, with some of the largest telecommunications customers on earth, I only heard the strongest agreement. They all, after all, are prolific distributors of free handsets.

Betting against FOSS is like betting against gravity. And free software doesn't mean no revenue, it means no barriers to revenue. Just ask your carrier.

To further add to his point, just because it is free does not mean it is frictionless. It has to be easy to install and easy to use. In addition, free can be time based or feature-based. What free means is lowering the barrier for a customer to use and love your product. It means more qualified leads and a shorter sales cycle. It means a lower cost of doing business-lower sales and marketing and lower implementation cost. It means a more capital-efficient business. The great news is that when the more established vendors like Sun jump on this bandwagon and educate their customers, it only further legitimizes this way of doing business for many a startup.

]]>http://www.beyondvc.com/2005/12/frictionless_sa.html/feed5Tips for the first VC Meetinghttp://www.beyondvc.com/2005/11/tips_for_the_fi.html
http://www.beyondvc.com/2005/11/tips_for_the_fi.html#commentsTue, 29 Nov 2005 21:06:08 +0000http://localhost/wp_beyond/?p=231I had a meeting last week where an entrepreneur insisted on showing me a demo first. He was scrambling around asking for wireless keys and looking for ethernet jacks, while I sat there and tried to engage him in conversation. He lost my interest right then and there. As I started to think more about it, I thought it would be helpful to share some of my thoughts on how to make the first VC pitch a better experience for all participants.

1. Be flexible: Have an agenda but listen to and know your audience. If the VC wants to run a meeting a certain way, be flexible, and go with the flow. I have seen many a pitch where an entrepreneur comes in with an agenda and wants to go through each powerpoint slide in excruciating detail. These meetings typically do not last very long as I wonder what it would be like working with that person or for that person. Deal with questions as they come up, not later. VCs can be impatient at times, and it really bothers me when an entrepreneur says, "Let's wait until slide 15" especially when you are just on slide 3. Meetings have a rhythm so be in sych with your audience. Startups require entrepreneurs to be agile and adept to respond to quickly changing market needs. If you are too engrossed with following every powerpoint slide, it makes me wonder how flexible you will be in responding to market conditions.

2. Have a well-honed elevator pitch: If you can't explain to me succinctly what your product does, what problem it solves, and how you will make money then I wonder how you will explain it to your customers. Don't worry, I want to see your baby in action, but save the demo for later as I want to hear you articulate these points first.

3. The Slide Deck: make it short and sweet, 15-20 slides will do. However, the best meetings happen when we never even touch the slide deck and end up in a free form conversation about the team, product, business, and market. Many times, I have even found myself brainstorming with the entrepreneur about other revenue opportunities and go-to-market strategies - I just love those types of meetings.

4. Listen and ask questions: try to get feedback about your business and the opportunity. The meeting is not a one-way street. Make sure you figure out if you like me, my firm, and my style as much as I am looking for a similar fit. Remember, it is a competitive market out there, and I need to sell my value add to you as well. Asks lots of questions - be open to feedback but do not be afraid to respectfully disagree. Not all of the feedback you receive will be right and many times it will be wrong, but take all the data you can so you can be better prepared for the next VC pitch.

4. The Demo: First, if you have any web-based business, I would hope that you have the wherewithal to have an alpha version running. As we all know it is cheap to start a company, and if you have not taken the first steps to get a product/service up and running, I am going to wonder whether you have the technical know-how to make it happen or the passion and risk-seeking behavior to be an entrepreneur. I love it when entrepreneurs have sunk some of their own money into their business or substantial amounts of time to turn their dream into reality. This shows me a real level of commitment. With respect to the demo, I like them live, but as Bob Rosenschein once told me, there are 20 things that can happen in a demo, 19 of which can go wrong. So be prepared and have a cached version of your service to walk through.

5. Next steps: In any meeting, never forget to ask about the next steps. What is the VC firm's process, when will they expect to get back to you, is there any more information that you can provide, etc...

A couple of other points to add:

Pre-meeting: Research the VC, the firm and get to know the types of investments that he/she likes to make, that the firm likes to make, and what is currently in their portfolio. Google is a great resource, look for VC blogs, and talk to others that may have pitched the VC and the firm recently. We need to sell to you as much as you need to sell to us.

A couple of don'ts: don't be late, don't be arrogant, and don't ask for an NDA before you start the pitch

Happy pitching!

]]>http://www.beyondvc.com/2005/11/tips_for_the_fi.html/feed22The Importance of back channel reference checkshttp://www.beyondvc.com/2005/11/the_importance_-2.html
http://www.beyondvc.com/2005/11/the_importance_-2.html#commentsMon, 21 Nov 2005 17:44:54 +0000http://localhost/wp_beyond/?p=233As an early stage VC, I spend a fair amount of time helping entrepreneurs build their management teams. I have written about what we look for (read the A-Player Domino Effect), the hiring process, and other facets of recruiting talent in previous posts. One area which I cannot overemphasize is the need for companies to do back channel references on candidates. We were recently doing a VP of Sales search for a portfolio company and in the intial call with the CEO and myself, we found the VP of Sales to be talented and engaging. A subsequent face-to-face meeting with the CEO and myself separately over the next week further bolstered our interest in the executive. After a few more meetings with various members of the mangement team, we decided to begin the standard referencing process where we collected the candidate' s list of published references and called to get a better understanding of the individual's strengths and weaknesses. Of course, the references all came back glowing. If they did not, I would be a little concerned. This is where most companies end the due diligence process and begin negotiating a contract.

However, I cannot overemphasize the importance of getting back channel references (references that were not given by the individual on the official list) to get a real view of the candidate. You need to look deep into your network and your VC's network to reach out to investors, executives, peers, and direct reports who worked with the candidate in prior companies to get a complete picture and balanced profile of the recruit. A wrong hiring decision for an early stage company can be a killer! All too often startup companies want to run fast and furious and hire that killer executive candidate ASAP without doing the extra work required to determine the right fit. In this particular case, through the back channel references we were able to find a number of inconsistencies about a candidate's effectiveness at a prior startup, his reasons for leaving, and his overall management skills. While the references were balanced and fair, they were far from glowing. In fact, most of the back channel references were consistently mediocre which for me was a vote of no confidence. Sure, you should always expect to get a couple bad references if you do enough of them on someone, but if you see a consistent pattern of concerns or "areas that need to be managed" emerge from those references, it is time to move to the next candidate. In fact, let me extend this message and state that doing back channel references should be standard business practice. Why learn in 3 months that a particular executive, VC firm, or business partner was not a right fit, if you can piece together that information beforehand? Just a little more work in the diligence process can save you lots of frustration in the long run.

]]>http://www.beyondvc.com/2005/11/the_importance_-2.html/feed4Spinning your wheels – the new reality in enterpise saleshttp://www.beyondvc.com/2005/11/spinning_your_w.html
http://www.beyondvc.com/2005/11/spinning_your_w.html#commentsThu, 10 Nov 2005 10:00:16 +0000http://localhost/wp_beyond/?p=234I was in a board meeting yesterday reviewing the sales pipeline for a portfolio company walking through the wins and losses. As I wrote in an earlier post, it is extremely important (to the extent you can), to get good data on your losses. Many times you learn more from your losses than from your wins. We like to know who we lost to and why. We keep a running tab of these losses so we can figure out some key trends, how our competitors are selling against us, and determine what sales tactics we need to employ to reverse the losses. Interestingly enough, over the last year a trend I have been seeing is the "do nothing" trend from enterprise customers. We find out that the potential customer has budget, we are selected as the winner, and then they do nothing. Obviously, the earlier you can identify a potential for spinning your wheels the better off you will be. Mike Nevens has a great post on SandHill.com outlining this new reality and ways to determine if you are spinning your wheels early in the sales process or methods to make your project one of the 5 out of 30 projects that actually get implemented rather than just approved.

The CIO of one of the largest retail banks in the US recently told me that he has about 60 new projects under evaluation. About half of them will pass technical, functional and investment hurdles. He will then fund 4 to 6 over the next two years.

That means that 25 or so projects that meet all objective criteria will not go forward.

Software vendors and investors need to understand and deal with this reality.

This is the new reality in selling to enterprises - doing nothing may be a bigger inhibitor to sales growth than your competition!

]]>http://www.beyondvc.com/2005/11/spinning_your_w.html/feed9Your baby is uglyhttp://www.beyondvc.com/2005/11/your_baby_is_ug.html
http://www.beyondvc.com/2005/11/your_baby_is_ug.html#commentsWed, 09 Nov 2005 09:03:20 +0000http://localhost/wp_beyond/?p=235I admire entrepreneurs for the risk they take and the unerring confidence they have in their product and market opportunity. However, what separates some of the great entrepreneurs from the average ones is an ability to acknowledge your weaknesses. As we all know, being an entrepreneur is a difficult job that is 24/7. Creating a new product or service can be draining but also quite rewarding emotionally and financially. Obviously, the last thing you want to hear when you get your initial first customers is to hear that your product has faults. For some entrepreneurs, it is akin to saying "your baby is ugly." Well, I have to tell you, I have seen a number of times where companies and entrepreneurs can drink too much of their own Kool-Aid and go quickly from product innovator and market leader to second place. In a recent example, I heard a couple customers tell a company that our field guys were a little too defensive about the product and somewhat condescending with respect to a customer's technical knowledge. In fact, the problem was not the customer, but our product. We made the requisite changes at the personnel level but it is obviously a more important issue reflected in the core DNA of the company. So as an entrepreneur, I urge you to create a culture of questioning the status quo, of constantly reviewing your weaknesses and figuring out ways to improve yourself, your product, and company. It can be very hard to do for an entrepreneur when your blood, sweat, and tears are in the product or service but it is always better for you to figure out how to make your company obsolete and thus improve it against competition rather than your competitors. I mean, even a big company like Microsoft is making an about face acknowledging the missed opportunity on the web for the second time. As a result, we spend alot of time pre-investment trying to understand the entrepreneur's motivation and goals as well as getting a feel for the culture in the company. Sure, we can always bring in a new CEO to fix the execution problems, but I am a strong believer that culture starts with the initial founding team and once it is embedded and institutionalized early on, it is very hard to change. As an entrepreneur, think hard about the core values you want the company to abide by as these will be the principles that take your company years into the future. ]]>http://www.beyondvc.com/2005/11/your_baby_is_ug.html/feed8Beware of fishing expeditionshttp://www.beyondvc.com/2005/10/fishing_expedit.html
http://www.beyondvc.com/2005/10/fishing_expedit.html#commentsMon, 31 Oct 2005 15:14:43 +0000http://localhost/wp_beyond/?p=237A number of our portfolio companies have been fielding calls from strategic buyers expressing an interest in acquisition. This is great news since many of the better acquisitions come whencompanies are bought and not sold. For a startup, it can be quite flattering to have a large competitor or suitor express an interest in buying your company. However, as an entrepreneur you have to be skeptical as many of these calls end up as just another fishing expedition from the strategic buyer. I have seen too many companies get overly excited about these acquisition feelers and waste time educating the potential acquirer only for the acquirer to either do nothing, build it themselves, or buy a competitor. In fact, you have to recognize and assume that many of these initial calls are just fishing expeditions where a strategic buyer is just trying to get as much information as they can about a market and the competitive landscape. You have to assume that they are talking to all of your competitors as well. Before taking your first meeting, make sure you get as much information you can to gauge the real interest in your company. Here are some questions you should be asking or thinking of during your initial conversation.

Who is calling you, what is their role, and what have they acquired in the past? You need to determine whether it is just a junior person screening or if it is someone with real clout and decision making power.

Why do they want to enter this market and what is the decision making process by which they will make a build/buy decision? If they are early in the process, you have to be concerned about wasting your time, educating a potential buyer about your market, and going nowhere with your conversations.

Have they talked to anyone else? In many cases, an acquirer may already know who they want to buy, but will still talk to other players to fully understand the market and the competitive landscape and to use you as negotiating leverage.

What are they looking for in terms of an acquisition? Revenue, product, management, both?

Who is responsible for making the acquisition work, and how does the acquirer intend to integrate your company into the existing infrastructure? Will the acquisition be run as a separate, stand-alone unit or will it report to a certain group. Knowing this will further help you understand the decision-making process of the acquirer, and who you may need to influence to get a deal done.

Before your first meeting, here are some questions you should have answered yourself:

What other acquisitions have they done, what multiples did they pay, and how recent were the deals? If the buyer hasn't done many acquisitions or if they paid low multiples do not start thinking about pie in the sky valuations for your company.

What is the company's market cap and how much cash is on their balance sheet? If your selling price is too high for the buyer based on the buyer's market cap or cash on hand, don't waste your time educating them about your product and the market.

Use your network to talk to some of the management or venture investors of companies that were recently acquired by the buyer to determine what their process was and to figure out if the opportunity is real or just a fishing expedition.

What is the corporate culture? Does the acquirer have an NIH (not invented here) syndrome or is there a history of openly collaborating with partners and looking outside for new technology?

Once again, it is always nice to have a large company call you and express acquisition interest. That being said, go into the conversations with a skeptical eye and make sure you do not waste your time as these strategic discussions can quickly lead to a dead end if not managed appropriately. The tricky part of the dance is trying to establish early in the process a range that the acquirer will potentially pay for your company assuming everything you tell them is true. The sooner you can get to this answer the sooner you will know if you should continue talking or just walk away. If you manage this process appropriately you may find yourself in a great place as many of the best acquisitions happen when companies are bought and not sold. The downside is that these discussions can suck up lots of your precious resources and be a tremendous distraction to your management team.

]]>http://www.beyondvc.com/2005/10/fishing_expedit.html/feed14Web 2.0 Bubblehttp://www.beyondvc.com/2005/10/web_20_bubble.html
http://www.beyondvc.com/2005/10/web_20_bubble.html#commentsWed, 19 Oct 2005 17:42:00 +0000http://localhost/wp_beyond/?p=239I had an enjoyable lunch with Jeff Jarvis today catching up on a number of things and brainstorming about value in the next generation web. During the conversation I vented a little frustration at the use of buzz words and bubble-like mentality with terms like Web 2.0. I am starting to get extremely tired and frustrated about every pitch that I see now where a company claims they are a Web 2.0 company and lists their principal reasons for being Web 2.0. It reminds me of the mid-90s when everyone said they were an Internet company and sprinkled their pitch with wild growth expectations from Jupiter Communications. Or when everyone said they were a Java company when Java was the cool buzzword. Frankly I do not care if you are Web 2.0, Web 1.0, etc. All I care about is what your service or product does, why it is valuable to the end user, why it is uniquely different from the competition, what the barriers to entry are, and how you plan on reaching your customers and how you will ultimately make money. Don't start your pitch with Web 2.0 ecochamber talk. In fact as Jeff and I discussed several companies and ideas, we concluded that most of them were just features and not companies. And as Jeff states, when small is the new big, then it poses problems for VCs as well.

Then Ed and I were talking about similar challenges for investors and entrepreneurs in the small-is-the-new-big age: Today, it’s much, much easier to start a new company on far, far less capital than it used to be. But this also means that it’s easier for someone else to start a competitor. So speed is more important than ever: You have to develop your business as quickly and nimbly as possible to build your product and then perfect it after it’s out so you quickly establish your value. This means that the VCs need to be able to act just as nimbly to invest as quickly as possible. The good news is that the investments are smaller and the risk is thus less. But the bad news, of course, is that it costs more effort and attention to manage many more smaller investments and it’s hard to act quickly at scale. Early bird, worm, and all that.

While getting in early and being nimble is a great way to make money, no matter how early you go, it is hard to build a sustainable VC portfolio investing in features. As an entrepreneur, if you can get up and running for $20-30k, so can 10 other talented people. Fred Wilson and a new VC blogger, Peter Rip, have written some thoughtful posts about a bubble mentality developing. I have written about it before as well in an earlier post comparing and contrasting 1999 vs today.

In other words, these business models are quite capital efficient. It is no wonder why VCs are quite excited about next generation web companies. All that being said, I, like others, worry about believing all of our own hype, and moving ourselves to another bubble. As you see from Tim's map and my table above, if it costs less to build and launch a company, then the barriers to entry must be lower as well.

So if you are an entrepreneur, stop talking about Web 2.0 and start talking about how you are going to scale your business and make money. Start talking about how you are going to create a defensible barrier to entry. Better yet, since it is so cheap and easy to get started show me whay you are not just a feature, show me your user growth, and show me how you will maintain your competitive advantage. Sure, as a startup, you will not have all of the answers and your business model may change, but show me that you care about these business concepts and that you have thought through these issues. While I am a big believer in the promise of the web, I see this less as a revolution but more an evolution from where we started in the mid-90s. We are talking about the same principles as the mid-90s, and we would not be here today were it not for the incredibly painful bursting of the last bubble. But with every bubble bursting comes a rebirth and from the last bubble what we have is lots of cheap bandwidth, resilient entrepreneurs who scraped for crumbs to survive, and a mentality to do it cheaply (rise of open source and leveraging commodity inputs). What we also have today versus yesterday are business models that can scale cheaply, be profitable, and throw off lots of cash. Let's focus more on these concepts versus being Web 2.0, as I do not want to think about what kind of rebirth will come from another bubble.

]]>http://www.beyondvc.com/2005/10/web_20_bubble.html/feed21Order takers versus order makershttp://www.beyondvc.com/2005/10/order_takers_ve.html
http://www.beyondvc.com/2005/10/order_takers_ve.html#commentsFri, 07 Oct 2005 02:05:36 +0000http://localhost/wp_beyond/?p=242I have to admit that hiring excellent sales people is not an easy task. Any sales person worth his weight can pitch with the best of them, articulate a strong value proposition, and demonstrate a nice track record of success. I like to look at past experiences on a sale person's resume and a history of overachievement. All that being said, I have also had plenty of sales managers come in the door with all of the criteria but just flail. Some have ridden a hot product in a hot market and others for some reason just cannot make the transition from one company to another or one market to another. One of the fundamental criteria that any startup needs to look for is hunger. If you are a sales rep at an early stage company with no name, no brand, and an unproven product, you better be hungry, make your calls, schedule your meetings and not take no for an answer. What this boils down for me is the difference between "order takers" and "order makers." In one of my portfolio companies we thought we hired the best team with significant industry experience having ramped up a startup to a successful IPO. What happened, in my mind and the CEO's mind, is that they got fat and happy. At the peak of their success from the prior company the sales team had performed so well that they transitioned from order making to order taking. Instead of going out and playing the numbers game-doing the dirty work, making the calls, and having the meetings, they expected resellers and customers to come to them. They expected the fax machine to ring with orders. They went elephant hunting in search of the big win which proved to be elusive or too lenghty an endeavor. So whatever you do when you hire your next group of sales reps, make sure they have the qualifications but more importantly make sure that they have the hunger and desire to win. Make sure that you have "order makers" and not "order takers." ]]>http://www.beyondvc.com/2005/10/order_takers_ve.html/feed10Skype, Siebel and frictionless saleshttp://www.beyondvc.com/2005/09/skype_and_siebe.html
http://www.beyondvc.com/2005/09/skype_and_siebe.html#commentsWed, 14 Sep 2005 16:25:00 +0000http://localhost/wp_beyond/?p=248What is clear to me is that companies that get it use the Internet in a big way as a sales and marketing channel and even a delivery mechanism for their products. Companies that don't miss a huge opportunity. Siebel does not get it, Salesforce.com does. Skype gets it while Vonage does not. What I am talking about is reducing friction in your sales and implementation process. The less friction you have in your sales and delivery model, the easier it is to scale. The easier it is to scale the faster and more efficiently you can grow. Software as a service is the epitome of this-easy to sell, easy to deliver, and easy to use. Of course, the one concern is the easier it is to implement a technology or service, the easier it is to rip it out.

Whether it be consumer or enterprise, all companies should think about how they can utilize the Internet for delivering their product.The more you do over the web (market, sell, deliver product, run your service) the more you can scale your business with incredible efficiency. After all it only took Skype 2.5 years and $20mm of capital to create $2.5-4b of value while it took Siebel a whole heck of a lot more capital, effort, and time to do the same. While Vonage is doing quite well with its growth, it still requires an incredible deployment of capital and it still requires users to wait for hardware to be shipped to their house before using it. There is more friction in using the Vonage service as compared to Skype. And obviously there is more friction to implementing Siebel than Salesforce.com. In this day and age we are all use to instant gratification and demand fulfillment. Salesforce.com and Skype provide that for its customers.

Of course, if you are selling an enterprise product with a high ticket price you have to be extremely cautious. It will only work if your product is easy to deliver (download, SaaS, etc.), install, and use. In theory, it sounds great to be able to generate great customer leads and revenue by offering your product over the web. However, this means that you will most likely be selling a product/service with a low ticket price which means you either need to have high volume to generate significant revenue or have an upselling machine which enables you to seed your customers with a lower price version and harvest them to get lots of repeat business from your initial sale. So as you are in your next strategy session thinking about how to get better leads and scale your business efficiently and quickly, do not forget to think about how you can leverage the web even more than you already do to market, sell, and deliver your product. You may not be able to do it all over the web but it is certainly worth taking an aggressive approach because if you don't do it, someone else may.

]]>http://www.beyondvc.com/2005/09/skype_and_siebe.html/feed5Missing an engineering release date can be a symptom of a larger problemhttp://www.beyondvc.com/2005/09/engineering_red.html
http://www.beyondvc.com/2005/09/engineering_red.html#commentsFri, 09 Sep 2005 08:34:07 +0000http://localhost/wp_beyond/?p=249I was in a board meeting last week reviewing a product release schedule for the next year. I was extremely concerned that we missed the last release, and as we dug in deeper what we saw were a few features scattered throughout the schedule tied to deals that were just closed. Now this would not be a big deal if these requirements were market-driven features that were necessary for a number of customers. However, the big concern was that most of these requirements were one-off features for specific customers that were just closed in the earlier quarter. So while engineering missed the release date for the product and should be held accountable, this analysis points to a much deeper issue and is a great example of how all of the various groups and functions in a company need to work together as a team.

My first thought was that if we continued on this path we would never have a product that met market needs. There would be no way that the engineering team could execute against its development schedule with a number of one-off requests. So we asked management to analyze the problem and report back to the board. The first place to look was product management to determine whether these customer requirements were one-off adjustments or features that were significant market needs that product management did not identify. The other place to look was sales to determine if sales reps were selling what we didn't have and promising the world to close deals. As you may know, a healthy tension between sales and product management will always exist. Sales will always want any and every feature to close that big deal and product management should only want features that will address broader market needs.

After a week, management reported back to the board and determined that the problem eminated from sales. More specifically, it was pretty clear that the sales reps were not properly trained or equipped to sell the product. When not armed with the knowledge and sales tools to properly sell, it was quite easy for the reps to get derailed during sales presentations, flail when addressing customer objections to the product, and agree to add one-off features to close a deal. To address this problem, management presented a plan to get the sales reps properly trained, equipped, and managed. In addition, management would have to play an ongoing role stressing the importance of closing the right deals and walking away from the wrong deals. So the next time engineering misses a release date, make sure you understand why because most likely it is a symptom of a much larger problem.

]]>http://www.beyondvc.com/2005/09/engineering_red.html/feed7Jobs at Gurunet (Answers.com)http://www.beyondvc.com/2005/07/jobs_at_gurunet.html
http://www.beyondvc.com/2005/07/jobs_at_gurunet.html#commentsWed, 13 Jul 2005 13:02:32 +0000http://localhost/wp_beyond/?p=252I have received many an interesting resume through this blog. Given that, I thought I would let you know of some job opportunities at Gurunet, creators of Answers.com. The company recently opened a New York City office and is looking to hire 2 in Business Development (one to help manage traffic partnerships and the other to manage content relationships), 1 in Marketing, 1 Online Advertising Sales Rep, 1 Linux Sytems Engineer, and 1 Office Manager. If you are interested, either send me a resume or send your information to jobs@gurunet.com. More details can be found here (Download gurunet_open_positions.doc).

]]>http://www.beyondvc.com/2005/07/jobs_at_gurunet.html/feed0Nickels and dimes don’t add uphttp://www.beyondvc.com/2005/05/nickels_and_dim.html
http://www.beyondvc.com/2005/05/nickels_and_dim.html#commentsTue, 24 May 2005 09:10:43 +0000http://localhost/wp_beyond/?p=256I recently helped negotiate an employment contract for a new hire at a portfolio company. It was clear from the very beginning that this new VP of Marketing was the right fit for the company and that the chemistry was there. Both sides were excited about moving forward until we got to the employment contract. In theory, we were in general agreement on salary range, bonus, etc. but what ended up scaring us was the fact that every issue, big or small, was negotiated to the nth degree. There was no give from the other side and when issues such as vacation days were hotly contested, I got quite concerned. In the end we passed on the candidate. We reasoned that if he was this difficult during a negotiation for his contract that he would be just as difficult to work with. I am not sure if he relied on his lawyer too much or if it was just his style, but either way negotiating every nickel and dime is not how to get deals done. I felt that the basic element of trust was never established in the negotiation.

My only words of wisdom for you is that In any negotiation, make sure you mark down your most important points and put them in a bucket. Place the less important deal points in another bucket. Try to put yourself in the company's shoes to understand their major points as well. I encourage you to ask for everything but at the end of the day be smart about what you really want-try to win on the big points but don't be afraid to give in on the small issues. At the end of the day, nickels and dimes do not add up.

]]>http://www.beyondvc.com/2005/05/nickels_and_dim.html/feed16Fundraising is a distractionhttp://www.beyondvc.com/2005/05/fundraising_is_.html
http://www.beyondvc.com/2005/05/fundraising_is_.html#commentsFri, 13 May 2005 07:40:39 +0000http://localhost/wp_beyond/?p=257I was speaking with a friend yesterday who recently signed a term sheet to raise a Series B round. While he did not hit it out of the park with the valuation, it was a nice step-up none-the-less and would provide his company with the capital to move forward and stay ahead of its competition. He and I both fully acknowledged that he could have pushed the valuation higher if he spent time with more than two venture firms, but we both agreed that the right thing to do was take the money and build the business. This was an easy decision because fundraising is a distraction and valuation isn't everything. When you are a lean and mean startup where you are just beginning to build your management team, every second you spend fundraising means more time that you are not working on your business. I have seen too many entrepreneurs go on the VC tour, spend too much time on fundraising, and consequently miss important milestones. In the end, the extensive fundraising process ends up backfiring since the VCs get concerned about lack of progress. So the next time you are faced with the prospect of raising money painlessly and quickly, the slight discount you take on your valuation today will be well worth it in terms of what you can do to build your business and continue innovating your product or service.]]>http://www.beyondvc.com/2005/05/fundraising_is_.html/feed4Working with partnershttp://www.beyondvc.com/2005/04/working_with_pa.html
http://www.beyondvc.com/2005/04/working_with_pa.html#commentsThu, 14 Apr 2005 09:23:17 +0000http://localhost/wp_beyond/?p=262I can't tell you how many early stage companies I talk to tout their great list of partners. I always step back in amazement at how a small company can support more than one, really large partner in the beginning. In fact, I remember being in a meeting with a strategic partner once and having them tell me that we would break if they put their resources behind our product. You have to realize there are 2 kinds of partners - technology partners and real partners. In my mind, if you and your partner are not generating revenue for each other than it isn't a real partnership but rather just a Barney press release. Yeah, you know the "I love you, you love me" kind of partnership that sucks precious resources from a startup and yields no value and no customers.

So how do you make a real partnership work? In theory, it is very simple but requires a ton of hard work. Here are a few rules I like to use when working with partners.

Rule #1 - Don't rely on corporate; engage at the field level. Many early stage companies try to create partnerships from the top down without recognizing that the real action is in the field. If you can bring your potential partner customers and lots of customers, you will get attention and be in a much better position to negotiate a real partnership.

Rule #2 - Focus, narrowly focus your opportunities.Many of your potential partners are huge enterprises, and it is easy for a small company to get lost in the shuffle. Try choosing a group in the large organization (it depends on how the company is organized) where you can effect a real P&L and create a strong value proposition. In some companies that might mean focusing on a vertical like energy or financial services while in other companies it may mean picking a specific function like business intelligence or compliance. Either way focus on groups where you can make a real impact.

Rule #3 - Your partner's sales force needs to get compedOnce you are able to demonstrate a handful of customer wins, it is time to get a deal done. No matter what kind of deal it is, make sure that your partner's sales force is comped for selling your product. If there is no comp for the sales force, your product will not move in a highly leveraged way.

Rule #4 - Dedicate the proper amount of resources to make the partnership successful.Once again, lots of companies think that once you sign a deal the hard work is done. On the contrary, this is just the beginning. You need to treat your partner like your largest customer and provide the same amount of focus on your partner as you do your customers. You will have to develop a joint business plan together, figure out the proper sales strategy, put together compelling joint collateral and presentations, offer sales and SE training to your partners and their resellers, and finally get your customer support ready. In addition, make one person responsible for making the partnership work.

Rule #5 - Don't get sucked into your partner's black hole.Be careful of developing custom software for your partner or making too many proprietary tweaks beyond the necessary integration. I have seen early stage companies too often bend over backwards without thinking about the real benefits of all of your partner's requests. As an early stage company you have to walk a fine line between leveraging partners for sales but also not becoming so glued to the partner that you alienate other potential channels. As I have said in previous posts, it is ok to say no to some requests especially if you can demonstrate why it will not help generate more sales for both comapnies. Either way, your partner will respect you and know that you are not a pushover.

As you can see, it is quite hard to support more than one partner for an early stage company.

]]>http://www.beyondvc.com/2005/04/working_with_pa.html/feed6Competing with the big boyshttp://www.beyondvc.com/2005/03/competing_with_.html
http://www.beyondvc.com/2005/03/competing_with_.html#commentsThu, 24 Mar 2005 15:25:41 +0000http://localhost/wp_beyond/?p=265I was talking to a portfolio company CEO today about his sales pipeline and one of the key items of interest for me was understanding competitive dynamics. Besides looking at the raw numbers, I like to understand whether or not we are seeing more or less competition, why we are winning, and why we are losing. As I started to dig into this area over the last two quarters I have noticed that the big boys or incumbents have started to show up in more deals. In my mind that is a good sign because incumbents don't enter a market unless they believe it is worth pursuing. I also typically do not mind competing with the larger players as they are generally less agile and less innovative than startups.

That being said, incumbents tend to add confusion in the marketplace and lengthen any startup's sales cycle. Their typical tactics including saying they have the product when they don't, promising they will have the product in one to two quarters (maybe three or four or never is the real answer), or giving it away for free in a bundle of other things that the customer buys. The last one is a tough one to counteract - I mean if the customer gets it for free, then it doesn't have to be as good as an innovative startup's product, does it? So how do you compete against these tactics?

First, as a startup you have to get away from a feature/function battle because you will always lose against a big boy. If a customer has already bought a product from an incumbent, they are more often than not willing to stay with that incumbent if they can deliver the extra feature/function soon enough in a good enough way. What I like startups to do is win with the product roadmap and vision. Show the prospect how you solve their needs today better than the incumbent but more importantly why you are different and how your approach will solve their future needs. If you can differentiate on this level, it gives you a much better chance to win.

One other piece of advice is that you must qualify the opportunity early in the sales process. If the incumbent is esconced in the account, you may be better off walking away quickly in pursuit of greener pastures. As I got off the phone with the portfolio company CEO today, what made me happiest was not hearing about all of the wins against the incumbents, but how we walked away quickly from those types of deals. Just today the CEO had a conversation with a particular prospect who said that our software was the best but the incumbent was willing to offer it for $30k instead of $150k. We ended up walking away from this deal and told the prospect to return to us when the product didn't work. Having been through this before, I can tell you that many of these prospects will come back to you. Over the long run, if the market is big enough and you build enough market share and critical mass early it will always be easier for an incumbent to buy you rather than start from the scratch. If not, you may want to figure out how you can partner with the incumbent or their competitors. Either way, remember one of your key advantages is to keep innovating and staying a product generation ahead of your competition.

]]>http://www.beyondvc.com/2005/03/competing_with_.html/feed6When competitors are acquired…http://www.beyondvc.com/2005/03/when_competitor-2.html
http://www.beyondvc.com/2005/03/when_competitor-2.html#commentsSat, 19 Mar 2005 11:30:00 +0000http://localhost/wp_beyond/?p=268It is clear that we are moving towards a consolidation phase in the technology sector. M&A activity has been heating up over the last 18 months as strategic acquirers are looking to bulk up and broaden their product offerings. During the last few months, we have had a few board discussions on this very topic. The conversations were not about us trying to shop any of our companies as I firmly believe that companies are bought and not sold (see an earlier post). Rather, our discussions focused on what happens when one of our competitors are acquired. Usually when a competitor is bought at a huge price the first reaction is why it wasn't me. The second reaction usually becomes fear as you begin to worry about what your competitor's product will do in terms of market share with a huge sales force and partner channel, strong brand name, and global infrastructure to support the customer growth.

Having been through this a number of times, this is the point at which you need to take a deep breath, stay the course, and look at the situation in a positive light. First of all, the majority of acquisitions fail. Secondly, your competitor will be inwardly focused and quite distracted for the first 6 months trying to integrate with the parent company. Finally, depending on how the acquisition was completed, employees will begin to leave as soon as they get the bulk of their money off of the table. When a competitor is acquired, rather than sulk and worry about why it wasn't you, try to aggressively exploit the situation and use it as an opportunity to grab market share and poach some experienced and talented personnel from your nemesis. Last year, for example, one of my companies was able to build an incredible sales team overnight, saving us six months of hiring and giving us an opportunity to hit the market harder and faster. So the next time this happens remember that you will more likely than not be in a better situation after your competitor is taken out of the market leaving you with plenty of opportunity to grow.

]]>http://www.beyondvc.com/2005/03/when_competitor-2.html/feed7Know when to say “No”http://www.beyondvc.com/2005/03/i_have_said_man.html
http://www.beyondvc.com/2005/03/i_have_said_man.html#commentsThu, 03 Mar 2005 11:24:04 +0000http://localhost/wp_beyond/?p=271I have said many times before that with respect to doing deals that saying No is as important as saying Yes. Let me elaborate. A portfolio company has recently been in trials with a potential strategic partner about a reseller relationship. We got in first, set the criteria for success to leverage our technical and business advantages, and were selected as the winner. We had the most customers, the best product, and best customer support. There was one huge caveat-one of our competitors who came in second place was willing to do the deal at a 50% discount. The strategic partner asked us to do the deal at that price if we wanted the win.

Of course, there was much deliberation on our side and as we ran the numbers over and over again there was no way we could understand how this competitor could ever make money on the strategic partnership. From our calculations, it would take a couple of years to breakeven off the deal under the very best circumstances. Trying to make the deal work for both sides, we went back to the potential partner and asked them to give us an NRE (non-recoverable engineering expense) and to handle level I customer support. At the very least, if the partner handled the first tier of customer support, we could be marginally profitable. The potential partner said no, and we walked away from the deal. Trust me, it was a tough decision, and we tried to rationalize why it made sense. However, when the deal is not a win-win situation it is very hard to make it work successfully.

From my perspective, one of the huge problems is that there is tons of VC money out there and lots of me-too deals as Brad Feld elaborated in a post recently. A space gets hot, lots of venture money pours in, and only a few companies survive while the rest vaporize. We do live in a competitive world and taking market share and killing your competition is part and parcel with being in a startup in a large market. That being said, what killed many companies during the bubble was pursuing market share at all costs. I feel like that mentality is coming back in the market. In my mind, losing money on every new customer signed up is not a long-term winning strategy unless you think you can get financed to infinity (yes, many did during the bubble). At some point in time, to be a real business you have to generate cash flow from internal operations. Having done enough deals, I am of the opinion that if it is extremely one-sided and never makes economic sense, it is a recipe for disaster. To that end, I wish my competitor the best of luck because I can see the train wreck around the corner. We will stay close to the strategic partner and when the time comes reopen the dialogue.

]]>http://www.beyondvc.com/2005/03/i_have_said_man.html/feed12HBS Compensation Surveyhttp://www.beyondvc.com/2005/02/hbs_compensatio.html
http://www.beyondvc.com/2005/02/hbs_compensatio.html#commentsThu, 10 Feb 2005 11:29:51 +0000http://localhost/wp_beyond/?p=275Professor Noam Wasserman of HBS along with individuals from J. Robert Scott, Wilmer Cutler Pickering Hale and Dorr LLP, and Ernst & Young LLP put together an annual compensation report for venture-backed companies. If you are venture-backed and interested in participating and receiving a free copy of the report to baseline compensation for your employees, I suggest going to CompStudy to get started. I cannot tell you how many times executives at my portfolio companies ask me for comp numbers for certain roles in their geographic area. While there are biases in any report, it is helpful to get a few of these different surveys to make sure your new hire's compensation requirements are in the ballpark. One final note-if you want to be included in the survey, please fill out by February 28. ]]>http://www.beyondvc.com/2005/02/hbs_compensatio.html/feed1Who owns the relationship?http://www.beyondvc.com/2005/02/who_owns_the_re.html
http://www.beyondvc.com/2005/02/who_owns_the_re.html#commentsThu, 10 Feb 2005 05:55:57 +0000http://localhost/wp_beyond/?p=276I was talking with a friend of mine yesterday about doing business development deals, and he was quite frustrated by the process that he was experiencing with one potential partner. He was calling on the highest levels at the company and knew that the ultimate decision rested with an executive committee. He met with 4 of the 6 members of the committee and each meeting seemed to be better than the previous one. In his last meeting, one of the executive committee members told him to go to yet another person to get the deal done. My friend was caught in a classic case of pass the hat. Everyone was excited about doing a deal, yet no one was willing to step up and take ownership of it. Before assuming any deal will happen, you need to ask yourself a few questions such as:

1. Who owns the relationship? In the example above, everybody was excited about a potential partnership, yet no one stood up to champion the deal and own it.2. Who will get fired for not doing a deal? Every person has annual and quarterly objectives they need to hit. If doing a deal with your company creates more work, then why should they do it. However, if doing a deal with your company fits in the parameters of their overall goals, then you are probably in the right spot.3. Who will implement the deal? In many cases, VCs and entrepreneurs can do a great job calling on a high level with executives at a company. However, the executives at a company do not usually implement the deal. Once a deal is signed, you need to understand who the day-to-day interface will be and how you and your company can make that person look like a hero.

In conclusion, I told my friend to stop wasting his time with that company and to focus on other deals. As a startup your resources are limited and some of the major decisions you make at a company are what you are not going to do rather than what you are going to do. In other words, you need to know when to say no. If you can do that earlier in a business development or sales process, the better off you will be.

]]>http://www.beyondvc.com/2005/02/who_owns_the_re.html/feed10Highlights from a recent VC panelhttp://www.beyondvc.com/2005/01/enterprise_smb_.html
http://www.beyondvc.com/2005/01/enterprise_smb_.html#commentsSat, 29 Jan 2005 01:45:00 +0000http://localhost/wp_beyond/?p=277On Thursday, I had the opportunity today to speak on a panel at the SAEC Global Venture Congress. Other panelists included the moderator, Scott Maxwell from Insight Venture Partners, Bob Gold of Ridgewood Capital, Robert Dennen of Enhanced Capital Partners, Todd Pietri of Milestone Venture Partners, and Roger Hurwitz of Apax Partners. Our panel was focused on helping entrepreneurs build a winning technology company. While there were a number of interesting thoughts presented by my fellow panelists, a few important highlights were the following:

1. Release early and often - It is better to release an imperfect product, get feedback, and continue evolving than trying to release the perfect product because you may never get there and run out of cash before doing so.

2. Filling the product management/marketing role early is key. Having a person who can shape the product and prioritize features by gathering the data in terms of what customers need near-term and what the market may need longer term is imperative. More often than not I find early stage companies that are engineer-driven that spend too much time on features that the market may not need. Avoid this problem early on and focus your limited resources on the right priorities.

3. Sales ramp - Do more with less and be careful of ramping up sales until you have a repeatable selling model. In other words do not hire too many sales people and send them on a wild goose chase until you have built the right product, honed the value proposition, identified a few target markets with pain, and can easily replicate the sales process and model from some of your customer wins.

While our panel was focused on helping entrepreneurs build a winning technology company, we also did have the opportunity to digress briefly and dive into business models that we liked. When Scott made all of us pick what type of company we preferred in terms of its target market from a list of enterprise, SMB, or consumer, it was interesting to hear the responses. I selected enterprise with the caveat that the company have a scalable business model (capital efficient, channel friendly, OEMable, possibly hosted, etc.) while a number of others voted consumer, SMB, and hosted software. If you asked the same question a few years ago, I am sure that enterprise would have been the overwhelming choice. While there was no consensus on SMB vs. consumer, it was quite clear that all of us had a limited appetite for investments in traditional enterprise companies predicated on large direct license sales.

]]>http://www.beyondvc.com/2005/01/enterprise_smb_.html/feed12You only have one chance to make a first impressionhttp://www.beyondvc.com/2005/01/you_only_have_o.html
http://www.beyondvc.com/2005/01/you_only_have_o.html#commentsFri, 21 Jan 2005 12:21:12 +0000http://localhost/wp_beyond/?p=279Yesterday, I had the opportunity to spend time with the CTO of a major financial services company with a $1 billion IT budget. In these meetings I like to learn about the major priorities and where the open opportunities for early stage companies exist. The good news was that the company was very open to working with entrepeneurial ventures. Priority number 1 for the organization was to standardize on a common architecture and infrastructure. When the company deploys a new app, the developers should only have to worry about coding the business rules and not about what infrastructure to deploy and how to manage the application. At the end of the day, like most large institutions, this company was focused on increasing capacity utilization and moving to an on-demand model where new applications can tap into a pool of resources, where these resources are monitored closely for performance, and where these applications can have real service-level agreements and chargebacks tied to them. The company said it was still early in the process and that alot of the big vendors still do not address the needs.

The other major initiative was security. We spent a fair amount of time talking about best-of-breed versus the single vendor approach. While the company had a bias towards single vendor for most infrastructure buys, it certainly was an advocate of best-of-breed for security. We talked about how a monoculture was not as immune to disease and attacks as a heterogenous environment. What this means is not only layering security but also deploying 2 different security products at each layer to avoid company or product-specific attacks. This is a big deal at lots of companies which is why, despite the intense roll-up activity in the security space, that new vendors will constantly have the opportunity to sell.

As always, I had the opportunity to find out where a few of my companies were in the sales process. The big takeaway for me was that "you only have one chance to make a first impression." What does that mean? Well, in today's environment, enterprises have the upper hand. This means that most enterprise sales end up in a proof of concept (POC) or bake-off against other competitors. So the first impression you make in the POC is the installation. If it is hard to install, forget about it. The logical conclusion your sales prospect will draw is that it is a hard to use product. So while you spend time building some great features and making your product more scalable, do not forget to spend time, lots of it, in the areas that customers touch and see. This means making the install process as easy as possible (this is where appliances can help in many cases) and making your GUI intuitive and easy to use. If you can't get this right, you will lose most deals or at least be fighting an uphill battle in a competitive bakeoff no matter how scalable or feature-rich your product is. I tried to get my company a second chance, but the impression was already made.

]]>http://www.beyondvc.com/2005/01/you_only_have_o.html/feed10Skype and a headset for every CEO!http://www.beyondvc.com/2004/12/skype_rocks.html
http://www.beyondvc.com/2004/12/skype_rocks.html#commentsWed, 29 Dec 2004 11:02:20 +0000http://localhost/wp_beyond/?p=283As I prepare for my trip to Israel this weekend for a board meeting, one piece of equipment I am sure to bring is my Plantronics DSP 400 headset so I can Skype with the CEOs in my portfolio companies. I have been using Skype for the last 6 months and can honestly say that it not only saves a ton of money but more importantly allows me to end the phone-tag game with my porfolio company CEOs and easily communicate with them. Sure VOIP is great from a cost-saving perspective, but having presence is even more important in my mind. I know when someone is available to speak and when they are not-no more wasted time with voicemails or I'll call you back later. As you know, as an active board member and investor much of the value add happens outside of the board meetings in ad-hoc in-person meetings and calls. Prior to Skype I had all of the CEOs that I worked with logged into IM, and we would frequently have long, off-the-cuff exchanges throughout the week. Well, with Skype, we can not only IM but through an extra click turn that into a high, value-add phone call. Just like in customer service, not every exchange needs to escalate to a live phone call, but having the ability to easily point and click to make it happen is a huge benefit. Wait till Skype adds live video to its platform and the value of that conversation goes up higher. Of course, the beauty of Skype is that as long as my laptop in logged into a network, I can easily make calls from anywhere in the world. Since it is the holiday season and a time of giving, one of the gifts that I sent to a new CEO hire (will be announced in New Year) was the the Plantronics DSP headset. I am now just waiting for him to get registered so we can start Skyping. ]]>http://www.beyondvc.com/2004/12/skype_rocks.html/feed8Some thoughts on building your teamhttp://www.beyondvc.com/2004/12/ones_mans_appro.html
http://www.beyondvc.com/2004/12/ones_mans_appro.html#commentsWed, 08 Dec 2004 23:44:00 +0000http://localhost/wp_beyond/?p=288I was recently advising a friend of mine who wanted to expand his team and hire some senior executives, and it occured to me that others could benefit from some of my thoughts on recruiting. As you know, hiring is a critical component in the success of any company. People and their ability to execute are what separates the winners from the losers in any industry. Hiring the wrong person, particularly in an early stage company, can cost you dearly. On the contrary, hiring the right person can make a huge positive impact creating significant leverage through what I call the A-Player domino effect. So here are some of my random thoughts on hiring new executives. I tried to make this as logical and short as possible - some of the thoughts below can clearly be expanded into longer posts.

1. Build a target profile: Put together a specification of the role, responsibilities, required experience, and intangible qualities you are looking for in a senior hire. Share the specs with your board for additional feedback to make sure everyone is on the same page with respect to the person needed and the major goals and objectives. Many times, the specification itself can highlight bigger issues about company direction if everyone is not communicating and on the same page. Does a board member want to change the goals for next year? Is everyone aligned with that change? Understanding who to hire and what their goals are incredibly important - hiring a person without having a spec will result in failure nine out of ten times.

2. With the specification in hand, put together a target list of potential companies where you can find this executive. The ideal companies are in the bullseye and others will be in concentric circles one or two removed from the center. For example, if you have a network security startup, the obvious players will be other security companies that sell similar products at similar price points with a similar distribution channel. One concentric circle out from the bullseye could include networking companies that have a similar business model and distribution channel. From an experience perspective, the perfect candidate will be someone who has had a VP role (if you are looking for a VP) and worked at other large brand name companies as well as been successful at earlier stage entities. Like in darts, it is not easy to get a bullseye (unless you spend too much time in the local pub), so you need to think of all of the tradeoffs that must be made in terms of the characteristics of a new hire which will include qualities like leadership, requisite experience, and domain knowledge. In general and depending on the role, I tend to prefer leadership and experience over domain knowledge and hungry, up and comers over rich and happy.

3. Begin the search - look in your own network - trusted people you or your board have worked with before always come first as long as they meet the spec. Putting a spec together eliminates the need to do favors and hire friends. If you can't find someone in your network, bringing in a knowledgeable executive recruiter can help. The right firm will always help you find the person not necessarily looking for an opportunity - many times that is the person you want for your company. When picking a search firm, I prefer boutiques or small, highly focused shops which tend to have the partners doing the work and making the initial calls to prospects. Your executive recruiter is an extension of your company and must be able to give a great pitch to high level prospects. A recruiter who gets it and can properly sell the story to prospective hires will truly help the company.

5. Make hiring a priority - You have to stay on top of the search. If you are using a recruiter, I suggest having weekly status calls in the calendar with members of the search team, typically one or two from the company and one or two board members. Regardless, if you want to bring high caliber talent in quickly, you have to make hiring a priority. The more time you put into it, the more you will get out of it. Whatever you do, do not slowroll the process and leave people hanging. Change a few meetings, etc. if need be, to get in front of the right person sooner rather than later.

6. Reviewing resumes - Resumes are not everything but what I look for is a person's story. Do they have a history of demonstrated success? Have they worked at other blue-chip startups or well known companies and been a top player? Were they responsible for delivering meaningful results and contributing to the success of the company? These are just some of the things that cross my mind when reviewing resumes. A history of working at companies that repeatedly failed will certainly worry me.

6. Interviews - It is always good to have a proper blend of selling and interviewing in your first meeting. Many times you will know by a person's resume whether they have some of the experience needed to do the job. Obviously you will want to dig into specific examples of how the prospect overcame challenges, drove new initiatives, led and hired a team, etc., but always leave some time to do some selling on the opportunity. Assuming you like the prospect, you should get another set of eyes like some of your VCs to meet with the candidate and interview him. As you meet a number of prospects, chemistry becomes an important determining factor in hiring. The superstar on paper may not always be the best fit for the team if the chemistry is not there. I always like to use the Detroit Piston/LA Laker analogy. Both teams had consummate professionals playing at the highest level of basketball but the team with all of the superstars did not come out on top - there was no chemistry. As you move a candidate further in the process, doing backchannel references are the most important ones you can do. That means you need to call some of the other VCs and execs at prior companies who are not on the candidate's reference list. You can learn alot about a person from these checks. I have passed on a number of candidates based on some negative backchannel references.

7. Close them - now you have the right person, get the deal closed as quickly as possible because as I have said before the longer it takes to close a deal, the more chances it has to fail.

]]>http://www.beyondvc.com/2004/12/ones_mans_appro.html/feed14NYC 2.0 (continued…)http://www.beyondvc.com/2004/12/nyc_20_continue.html
http://www.beyondvc.com/2004/12/nyc_20_continue.html#commentsFri, 03 Dec 2004 09:46:34 +0000http://localhost/wp_beyond/?p=291In the past, I have written about a number of first generation NYC entrepreneurs coming out of the woodwork to launch new ideas. Sure, the market may not be great right now but in my opinion it is the best time to build a business. As an entrepreneur you have time to develop your product, refine and test it, and get it ready for when the market turns. The most recent addition to this list of second generation entrepreneurs is Andrew Erlichson, former CEO and cofounder of Flashbase.

When I first met Andrew in late 1998, he had just finished his Stanford Ph.d program in EE from Stanford with other well-known classmates. My fund seed invested in his idea which was to allow anyone to build database-enabled, web-based applications through a simple GUI. Some of the applications that users built ranged from simple forms for their website to richer ones like help desk, call center, project management, and sweepstakes apps. This was 1998 and Flashbase was a true predecessor to Intuit's Quickbase. We were obviously way too early but after a year of blazing this trail, we ended up selling the company to Doubleclick for a nice return. After spending a few years with his golden handcuffs on at Doubleclick, Andrew is back in action with his next project, Phanfare.

Like any great consumer service, the company started because Andrew wanted to solve his own problem with sharing his digital photos. For many, the first instinct with a digital camera is to make prints. However, it is clear that this will evolve and people will share more and more of their pictures online. The problem is that the print sites only want you to share with friends as a vehicle to sell more prints. They do not keep your photos up indefinitely, their branding is all over your private albums, and your friends and family get bombarded with email to buy more prints. So Andrew did what most entrepreneurs do, created his own software and service. Simply put, Phanfare allows users to share and back up their digital photos in a simple, permanent, polished, and unbranded way. You can even use your own URL to share photos.

From a technology perspective, we are seeing an evolution in the way network client software is written. Initially, the client sw was web-based, with simple html as the implementation technology. Then interactive sites moved to using client side scripting like javascript. Now, for media intensive applications, we are starting to see full fat client network applications like iTunes. While I am a fan of software as a service, it truly makes sense for apps manipulating or using large files to be client-side but network-enabled. With Phanfare's client software, you can manipulate your pictures locally from within the app while your website stays in synch in the background. While the idea of sharing photos does not sound like a heavy-duty technology initiative, Phanfare's founders were trained to build cache coherent multiprocessors at Stanford. This means that like any web-based service you can use Phanfare from any computer with a simple download and keep your albums synched.

So as the holiday season approaches and you snap tons of photos of your friends and family, I suggest giving Phanfare a try. I have my own family website and may just transition it all to Phanfare. While the service is great, my only question is how big this market will be for Andrew. That being said, it is great to see Andrew back with a new venture.

]]>http://www.beyondvc.com/2004/12/nyc_20_continue.html/feed4The train is leaving the stationhttp://www.beyondvc.com/2004/11/the_train_is_le.html
http://www.beyondvc.com/2004/11/the_train_is_le.html#commentsFri, 19 Nov 2004 22:21:30 +0000http://localhost/wp_beyond/?p=293Early stage companies have to be nimble and disciplined when creating and releasing product. One of the important decisions a startup can make is how it chooses to manage its product releases. In a software company a product release affects everyone. A mistimed release can severely impact sales, cash flow, and the company. We had a thorough discussion in a board meeting this week on this very topic. I have to admit I was quite pleased with our new VP Engineering as she put forth her methodology and process, shared below.

There are a couple of different ways to manage engineering releases. One engineering release is date driven, the other is content driven. In a date driven release, the team knows when the next release is out but does not know exactly what will be in it. The release runs like a train schedule, whoever makes it to the station on time is part of the release. The other release is content driven; the team knows what is in the next release, but does not know the exact ship date. The release runs more like an airplane shuttle, it takes off only when full.

While I may be oversimplifying the issue, the one that I like my companies to subscribe to is the date driven one. Of course, just because it is date driven does not mean that there isn't a highly focused theme. It just forces the team to clarify the absolute minimum requirements necessary to deliver the right product for the market. It also discourages feature creep and encourages highly disciplined prioritization. Most importantly, having a date driven release can get everyone at the company aligned. Everyone knows the ship date and sets their schedule accordingly to ensure that all pistons are running as GA hits. This means marketing has to have its collateral ready, upgrade program in place, and product launch schedule set. Sales knows when it can start telling prospects about the new product and time it appropriately so it can get customers lined up for the next quarter without delaying sales in the existing one. Engineering, of course, needs to deliver product and not get distracted. While all of this discussion on product releases sounds great, none of it really matters if you do not have the experienced team that can manage them and instill the discipline. So as you think about your next product release, think long and hard about whether you want the trains to run on schedule or the airplane shuttle to be full. You know where I stand on the issue.

]]>http://www.beyondvc.com/2004/11/the_train_is_le.html/feed5Bad customers can kill your businesshttp://www.beyondvc.com/2004/11/the_difference_.html
http://www.beyondvc.com/2004/11/the_difference_.html#commentsFri, 12 Nov 2004 09:22:00 +0000http://localhost/wp_beyond/?p=294It has been awhile since my last post as I have been busy with a number of board meetings. It is so hard to find time. Anyway, one thought I wanted to share with you is a discussion we had in one of the meetings about the balance between closing large deals and adding new features.

More often than not, you will hear a sales person complain about their product and tell corporate that if they had these 5 features, they could sell more. Since sales people look for the path of least resistance, they typically go back to marketing and development to ask for the fixes and changes to close a new customer. Many times, management, in pursuit of meeting their numbers, will oblige and make the requisite changes to land a new customer. If you fast forward into the future and continue this behavior, you will end up with a company that has a number of customers but also a support nightmare-too many different versions of a product which makes it difficult to maintain and support from a development and customer service perspective. In addition, you end up constantly delaying the next release of your product as precious resources get sucked away. You also have lots of features that the market does not want. Finally, the profitability for each customer goes down significantly as you add new features just to close deals.

In the long run, having too many of the wrong customers can kill your business. The more experienced and disciplined team will not build a new feature for every customer but rather have a seasoned and proactive product management process for gathering data from the field and prioritizing feature requests based on market and customer need. In some cases, it may make sense to give a feature request higher priority as a number of prospects and customers have asked for it. In other cases, you will have to make a decision of whether or not to build a one-off feature to close a deal or lose it to a competitor. While every situation is unique, in general, you have to be extremely careful of going down the slippery slope of customized versions of your product for every customer as the one-off requests will suck up your resources. It is easier said than done, but the simple rule is don't add features if the market does not need it.

In the end, I never like my portfolio companies to end up in feature/function wars. That is a losing proposition. Rather it is important to take a step back sometimes to see if you can change the playing field on your competition by positioning yourself differently. This includes understanding the customer and market, pitching a longer term vision and product roadmap that maps to the customer and market needs beyond today's purchase, and then making them feel that tactically you have enough of what it takes to solve their problem in the short term. If done right, you can help the customer understand why one missing feature today may not be so critical since your company is the only one that can meet their needs in the longer term.

]]>http://www.beyondvc.com/2004/11/the_difference_.html/feed2Strike while the iron is hothttp://www.beyondvc.com/2004/10/strike_while_th.html
http://www.beyondvc.com/2004/10/strike_while_th.html#commentsWed, 13 Oct 2004 10:06:05 +0000http://localhost/wp_beyond/?p=300I was speaking with a friend of mine today who mentioned that his term sheet for his Series A round fell through. Things looked great for the last 6 weeks and then the deal process went into a stall regarding intellectual property rights. To make a long story short, one of the co-founders of the company built the company's software in his spare time. However, he also had a full time job and decided ultimately to stay there rather than join the startup. Well, you can imagine that down the line the company that the co-founder worked for could potentially claim rights to the IP. Rather than leave this open to chance, the VC and the early stage company did the right thing and decided to clean up the ambiguity. Today, the IP is about to get assigned in the proper manner. However, the VC got cold feet and backed out of the deal.

So what happened? You see, deals take a life of their own. The more time it takes to close a deal, any deal, the more chance there is for it not to happen. Momentum is a powerful force but deal inertia can be more powerful. It sounds like the VC just got tired of the deal and also got cold feet as it seemed that a competitor or 2 cropped up during the deal closing process. This is not the only story of delayed deal closings. I was interviewing a CFO candidate for one of my portfolio companies yesterday and one of our discussion points was why a potentially large deal fell through. From his perspective, his side tried to overnegotiate the fine points, extending the closing out by a month. During that time the potential acquirer missed its numbers, got hammered by the street, and decided to back out.

My advice to you if you are going to raise a round is to make sure that you are prepared for all that may come at you in terms of due diligence. Have your financials clean, make sure your IP is owned by the company and not by any consultants, and have your references teed up to talk to potential investors. The more prepared you are the more impressed the VC is and the quicker the deal closes. One other point to remember, do not overnegotiate. Figure out the big picture of what you want in a VC partner and deal, negotiate those points but be willing to give up other points that the VC cares about. I have been in a few situations where an entrepreneur overnegotiates, and it certainly makes me wonder what it will be like to work with that person post-closing. Will there be give-and-take in our VC-entrepreneur relationship or will that entrepreneur always try to get his way?

]]>http://www.beyondvc.com/2004/10/strike_while_th.html/feed2Thoughts on picking your VChttp://www.beyondvc.com/2004/09/thoughts_on_pic.html
http://www.beyondvc.com/2004/09/thoughts_on_pic.html#commentsTue, 28 Sep 2004 16:48:00 +0000http://localhost/wp_beyond/?p=305Jeff Nolan has a comprehensive post on choosing your VC. I totally agree with Jeff's view that not only should entrepreneurs do their diligence when choosing a VC to invest in their company, but VCs should also do reference checks on their new partners. This includes understanding potential board dynamics and making sure investor interests are aligned. Put it this way, a bad board with bad dynamics rife with egos and competing interests can bring a company down quickly. Some areas to explore include understanding the size of fund, the amount of dry powder, the appetite for risk, the view on the existing business plan, team, and management gaps to fill. As an example, a smaller fund with less dry powder may want to grow less agressively than a larger fund with more capital to invest. Not that the situation above can't work, but it is incumbent upon the entrepreneur and existing VC to understand the potential areas for conflict and make sure they get comfortable with them. This means that the entrepreneur and existing investor should spend the appropriate time to get to know their potential partner (if they do not already know them) in addition to doing the right reference checks (see Jeff's post for areas to dig). ]]>http://www.beyondvc.com/2004/09/thoughts_on_pic.html/feed0Running an efficient board meetinghttp://www.beyondvc.com/2004/09/running_an_effi.html
http://www.beyondvc.com/2004/09/running_an_effi.html#commentsTue, 14 Sep 2004 12:52:42 +0000http://localhost/wp_beyond/?p=307Board meetings can be a gigantic waste of time if not run appropriately. On the flipside, they can be a valuable source of input and guidance for a management team in the pursuit of maximizing shareholder value. While there are a number of different ways to approach and run a board meeting, I thought I would outline a few of my philosophies on them, and what I expect from my portfolio companies in terms of content.

1. Be prepared: Board meetings are like theater. Like any play, I expect the CEO to have a well thought out and scripted agenda for the meeting. The most efficient way to do so is to lay out an agenda and get feedback pre-meeting from the other board members to ensure that the board covers appropriate topics and allocates the right amount of time for each one. From an update and preparedness perspective, the CEO should always go into the meeting having a complete understanding of where the various board members stand in terms of any major decisions. There should be no surprises. This means that the CEO should have individual meetings and calls in advance of the board meeting to walk each director through any decisions that need to be made and the accompanying analyses behind them.

As far as board packages are concerned, I typically like to receive them at least 48 hours in advance so I can process the information and be in a position to ask intelligent questions.

2. Timing: For an early stage company, I typically like to meet in person every 4-6 weeks. Lately I have been skewing to more of a 6 week time horizon. I believe that timeframe gives the team enough time to execute on some of the goals outlined in the meeting and not spend their time constantly doing powerpoints for the board.

3. Content: As much time as possible should be spent on discussion, rather than update. What I want to know about is the management team's priorities and why, how they are tracking against those goals, and what keeps them up at night with respect to meeting their objectives. What I do not want is a litany of presentations and tech demos with no discussion. At board meetings we should continually evaluate and monitor the company's strategic goals, understand where the market is and how we are positioned vis a vis our competitors, and discuss management's plans, priorities, and performance.

While there is no right way to run a meeting, having a framework can be a great way to lead organized and informed discussions. A good framework that I like to use is having the CEO give a high level company overview followed by a department level drill down delivered by the functional head. Typically, in the context of these department-level updates, discussion will ensue on milestone progress, roadblocks or hurdles to realizing the goals, resource constraints, performance of various employees, and any potential addition or subtraction to the list of goals.

Listed below is a standard framework that I like to use in board meetings along with some sample reports that help guide the discussion and allow directors to review performance. By no means is this meant to be an exhaustive list. Alot of these reports serve as good leading indicators for potential areas of problem down the road and none of these should require management to reinvent the wheel.

Company Summary by CEO -Company overview discussing recent performance with highlights on each department -Summary of key matters to be presented and decisions that need to be made - remember that decisions can only be made if the directors are all familiar with the issues and have had a chance to review the supporting analyses and risk factors pre-board meeting

During the meeting, it is the CEO's responsibility to cover the agenda and keep the directors on topic and focused. That means if the conversation runs off on a tangent the CEO has to bring everyone back in line and table the discussion for another meeting.

R&D: -Summary development plan of key features to be delivered for quarter and current progress -Bug report broken out by severity-should also track resolution and time outstanding against prior months/quarters

Depending on the stage of company, the time of year, or crisis of the quarter, there will be a much deeper dive into various departments to discuss topics such as product roadmaps, the budget, the sales plan, and partnership strategy. The more information the board has in advance by way of supporting analysis, the more informed the discussion will be.

At the end of the board meeting, I typically like to have a board-only session where the members can not only make the requisite board approvals for stock option grants and the minutes but also feel free to discuss any pertinent or sensitive topic like executive compensation, budget planning, financing/exit strategy, or concerns about personnel. This session allows the directors to evaluate any management proposals and comment on performance in a candid and open forum without embarassing or browbeating any executive. While a board meeting should only last 3-4 hours for the most part, you have to remember that much of the work of any board happens outside of the formal meeting and through the informal daily/weekly interactions with the mangement team via telephone, email, IM, and face2face meetings. This is where the heavy lifting happens. When you find yourself diving too deeply into a discussion on sales tactics, for example, the board may be better off saving that conversation for after the meeting. Before you present next year's plan to the board, you should run it by a few of your more active board members for comment and advice before rolling it out to the whole board. If you find yourself having 8 hour board meetings, then you are probably getting too focused on the details (breakout sessions or scheduling subsequent informal meetings to drill into a particular topic is more appropriate) and not doing enough preparation in advance of the meeting.

If you are more interested in the board's role and who should be on the board, I suggest reading some excellent posts from fellow VCs Brad Feld, Fred Wilson, and Jerry Colonna.

UPDATE: Fred Wilson adds to my post emphasizing the non-executive board discussion. As Fred says, it is always a great idea for the non-executive directors to be in synch wih their thoughts and overcommunicate prior to and after the board meeting. This also means having the right people in and out of the room. I totally agree.

]]>http://www.beyondvc.com/2004/09/running_an_effi.html/feed11Ready-Fire-Aimhttp://www.beyondvc.com/2004/09/readyfireaim.html
http://www.beyondvc.com/2004/09/readyfireaim.html#commentsThu, 09 Sep 2004 18:30:49 +0000http://localhost/wp_beyond/?p=308Whether you know it or not, this seems to be the way that alot of early stage companies make strategic and tactical decisions. People run around the halls and manage by crisis, moving from one deal or issue to the next without any overarching goals and process in place. Solving this not only requires better planning but also staying disciplined, holding you and your team accountable, and executing on those goals. Trust me, this is top of mind for me as this is the time of year that many companies start formulating their plans and goals for 2005. We have all been through a number of these so-called planning sessions and have come out with great plans and ideas, but the problem most of the time is that the execution of it never happens. Hopefully, some of my thoughts and suggestions below will help you simplify this process and create a framework to measure, manage, and execute.

So let me first start with accountability. Without accountability, it is hard to manage a business. What I typically like to see is a management team put together a few simple company goals, say 3-5, which are easy to remember and that can be measured by Yes/No answers. If you have too many goals or if you cannot measure them, then you cannot manage them. With simple Yes/No goals there should never be any ambiguity about completion. Those goals are usually then rolled out by department (3-5 goals that help the company realize its overall goals) so that marketing, sales, and engineering can be in synch with the company goals and so they can be easily monitored and measured by the executive team and board. Obviously you must be flexible and make course corrections through the quarter and year, but this process helps the executives all get on the same page and drive the company in the right direction. If you don't have knock down, drag out fights over the company goals and the appropriate allocation of resources to realize them, then you are probably not challenging each other enough. Once the goals are set and agreed on, you must communicate and share them with the whole company.

By way of example, an overall goal could be to ship version 4.0. It is a pretty simple Yes or No proposition. Obviously when you roll it down to marketing and development, each department will have its own priorities to make the shipment of version 4.0 a reality. Whenever a new issue or opportunity arises your team can always ask themselves whether or not doing X can help them realize the goal. If not, then it is probably not worth doing. Yes, you have to be flexible throughout, but having a guiding light or north star to rely on can help you better manage your people and help your people better manage themselves. As you can see, when it comes time to running the business on a day to day basis, these goals can be quite helpful in moving your company from a Ready-Fire-Aim business to a Ready-Aim-Fire one. Remember, being an entrepreneurial company means by definition you have limited resources and need to allocate them appropriately to get the best bang for the buck.

Obviously it is quite difficult to cover the above topics in such a brief post, but I hope to dig deeper into the strategic plan and budgeting conversation in future posts. Maybe you can even suggest some other areas of interest for you?

]]>http://www.beyondvc.com/2004/09/readyfireaim.html/feed1Post mortemhttp://www.beyondvc.com/2004/08/post_mortem.html
http://www.beyondvc.com/2004/08/post_mortem.html#commentsWed, 25 Aug 2004 15:32:22 +0000http://localhost/wp_beyond/?p=312I recently had a board meeting for one of my portfolio companies and was upset because during the sales pipeline review we only heard great things about the pipeline, new closed deals, and the possibility of beating our quarter yet again. What bothered me, however, was that we did not spend enough time discussing the big losses or missed opportunities. Evaluating losses is a great leading indicator for health in a business. If you can get to the heart of why you are losing deals early on, you can prevent big problems down the line. More often than not, management teams will do the opposite and revel in their victories and not spend enough time in defeat. Great management teams, however, will learn from their losses and missed opportunities - they will learn what went wrong and why to make sure it never happens again. This is like preventitive medicine - diagnose early before large problems arise. This, in my mind, is an important trait to institutionalize in a company. While hitting your quarter is a great thing, if you never take a proactive stance and do post mortems on lost opportunities, your competition will eventually catch up to you. Talk to the prospect and try to understand whether it was the process, the sales person, the product, pricing or competition. After a few of these data points, you will have a better view of why you lost and what you can do to fix it. I strongly believe that you can learn just as much from your losses as you can from your wins. ]]>http://www.beyondvc.com/2004/08/post_mortem.html/feed0We don’t like surpriseshttp://www.beyondvc.com/2004/08/we_dont_like_su.html
http://www.beyondvc.com/2004/08/we_dont_like_su.html#commentsWed, 04 Aug 2004 12:43:03 +0000http://localhost/wp_beyond/?p=315One of the recurring themes of dealing with VCs and boards is that we do not like surprises. In addition, tell us the facts, and if there are any negative surprises give us action steps on how you are going to remedy the situation. I have written about the VC/Entrepreneur relationship before and due to its importance will continue to write about it in this blog. Yesterday was one of those days where these themes kept surfacing in my conversations and email and I thought I would share a couple of examples with you.

In one meeting yesterday a VP of Sales candidate for one of my portfolio companies walked me through one of the biggest lessons learned in his first start-up experience - lay out realistic numbers and hit them. That means that if you do not have 100% confidence that you will hit the quarter, don't pad your sales pipeline and wait until the end of the quarter to tell us about a potential miss. You are not doing us a favor by letting us feel like we are going to hit the quarter. Tell us as soon as you know - yes, board members can read between the lines as sales is a numbers game. In addition, explain the action steps you will take to solve the problem so it doesn't happen again. To say the least, he learned alot from that first board experience.

Later in the day, I got an email from another portfolio company's CEO outlining a potential issue with a key partner. Not only did I like the fact that he communicated with the board right away, but I loved how he included a detailed action plan to resolve the issue. This included securing a meeting with the decision maker ASAP. While all of us were concerned about the news and shared our own thoughts on the action plan, we all felt like we were doing all that we could to overcome the partner's issues. In the end, I am sure it will work itself out, but it would have been utterly inexcusable if we learned about this after the fact.

Anyway, I hope these stories continue to hammer home the importance of working with your board in an open and collaborative manner. Look, bad things happen, but what gets a VC and board upset is not knowing soon enough, soon enough to potentially take corrective action. ]]>http://www.beyondvc.com/2004/08/we_dont_like_su.html/feed0How startups succeedhttp://www.beyondvc.com/2004/07/how_startups_su.html
http://www.beyondvc.com/2004/07/how_startups_su.html#commentsMon, 19 Jul 2004 14:01:15 +0000http://localhost/wp_beyond/?p=317If you ever wondered what it takes for a startup to succeed, please read the email below sent from the CEO of one of our portfolio companies to his whole staff. Sure, startups don't have the cash, the people, the distribution channel, and brand to compete with the established players but passion, drive, and an insanely great product can take you a long way.

Dear team members:

I have always believed that the key reason for our continued success over the past few years has been, the contributions made by each and every one of you. Without your sincerity, commitment and hard work, we would not have become the #1 partner for Company X.

I want to share with all of you, an extremely powerful example of sincerity and commitment, shown by one of our fellow team members. I am sure that each one of you will feel proud of him after reading what he accomplished this week!

On Tuesday, July 13th, after finishing a bunch of very successful presentations in the Washington DC Area, John Smith (aka Mad Dog from his army days) took a flight for Memphis, TN where he had to do a presentation in the morning on Wednesday, July 14th. John had to change flights in Atlanta on the way to Memphis. Due to extremely bad weather on the east coast, his flight into Atlanta got delayed and he missed his connecting flight to Memphis. The next available flight to Memphis was the next day at noon, which would cause him to miss his morning presentation. So John asked the airline if they would reimburse him for a rental car to drive from Atlanta to Memphis, thinking that it would be a few hours drive. The airline agreed, so John rented a car and started driving to Memphis from Atlanta. John had been in touch with Dave when all this was going on, so after he started driving, Dave did a quick check on Mapquest and realized that it was a 400 mile, 7 hour drive and not a “few” hours drive as John had thought (it never hurts to be good at Geography!). But Mad Dog did not stop or turn around, he kept driving (with a few coffee breaks to help keep him awake at the driving wheel). He reached Memphis at 5:30 AM, rested for an hour at his hotel and went on to do his presentation – which was very well received. Folks, this story does not end here………..

John then took a flight from Memphis to Jackson, MS where he was scheduled to train 30 users for one of our major customers THROUGH THE NIGHT of Wednesday, July 14th! He got into Jackson, slept for a couple of hours and then went to the customers offices to conduct training for these 30 users from 10 PM to 5:30 AM! The training was extremely well received (I have received e-mails from the Company X Sales managers giving kudos to John for his quality of training that night). Today morning he flew from Jackson, MS back home to Dallas, TX.

John: I am very proud of your commitment and dedication to work. Please make sure you get some well deserved rest over the weekend.

PS: In the future, please call one of us from the airport to check how far your destination is, before you start driving!

Everyone is talking about the slowdown of growth in the enterprise software sector as one of the main reasons driving consolidation talks at companies like Oracle/Peoplesoft and Microsoft/SAP. We all know that the enterprise software business characterized by large licenses and 20% annual maintenance revenue is lucrative but also hard as the big get bigger and the little guys disappear. Given the number of negative preannouncements this week from enterprise software companies, this Forrester graph from a CNET article summarizes the market quite well.

Looking at this graph, it is no surprise that companies are looking to consolidate. Given that maintenance revenue is such a large percentage of overall revenue and growing and given that it is also highly profitable, why shouldn't some larger players in the market consolidate the industry, keep the maintenance revenue and cash flow, and stop everything else? With that backdrop, I find it quite interesting to learn that CA's ex-CEO, Sanjay Kumar (the master of these deals), advised Oracle on their Peoplesoft acquisition. According to a New York Newsday article, here is what Sanjay had to say on Oracle's strategy of buying Peoplesoft and gutting it:

At the same time, Phillips said Kumar advised "he would have the same plan post acquisition but just would not have said so up front. Everyone knows but you can't say it and freak out the customers up front."

As for which employees to keep and which to discard, Kumar, whose CA acquisitions were notorious for scuttling thousands of workers, offered clear advice.

"Don't get rid of the presales folks; only the sales," Phillips quoted him as saying. "The presales guys know the products and customers and they will get you easy add-on sales . . . and it would be crazy to forgo that revenue and those relationships . . . You don't need the sales guy -- those are for new account hunting."

What does this mean for me from a venture perspective? Well, what I have believed for a long time is that it is hard for early stage companies to build direct sales models predicated on "elephant hunting" and going after huge deals. Each sale is incredibly long and expensive. In addition, as you can see from a number of large public software companies, revenue is lumpy and therefore less predictable as customers wait until the last day of the quarter to squeeze you for a larger discount. Despite this, we are still bullish on software companies selling to enterprises. In our mind it just requires a rethinking of what business models will work and why. Think seed and harvest - lower price points, more volume, lots of upsell over time. Think of software models with leverage - hosted software and modular software which can be resold, OEMed, and/or appliancized (if that is a word). So please read an earlier post for more detail.

]]>http://www.beyondvc.com/2004/07/everyone_is_tal.html/feed1The A-Player Domino Effecthttp://www.beyondvc.com/2004/06/the_aplayer_dom.html
http://www.beyondvc.com/2004/06/the_aplayer_dom.html#commentsThu, 24 Jun 2004 17:40:18 +0000http://localhost/wp_beyond/?p=325Like any active, early stage venture investor, I have spent a fair amount of time helping my portfolio companies build a management team. And like any venture investor, I wish I could boil hiring down to a more scientific method to make sure that each person we bring on to a company is better than the next. However, that does not always happen. The one constant in hiring, however, is the "A-Player Domino Effect" which basically says that when you hire an A-Player, they bring lots of other A-Players to the table. Think about it this way. Why do so many people want to play for the Yankees? Sure, it is the cash, but it is also the opportunity to work with other A-Players to win a pennant that lures A-talent to New York. Same with the Lakers-Gary Payton and Karl Malone took pay cuts to join the Lakers and Shaq and Kobe to win a championship. I am not saying that in order to have a successful company you have to have a lineup of proven all stars since team chemistry plays a huge role. In fact, every company may have a different definition of what an A-Player looks like. Look at the Detroit Pistons, full of chemistry and a solid bunch of hungry players, who took out the all-star laden Lakers in the NBA Finals.

However, in many of my successful companies, the first couple of VP hires made all of the difference in the world in terms of attracting strong talent and positioning the respective companies for success. For example, one of my companies just brought in an experienced VP Sales from a competitor in the market. Once he signed, he brought on 2 of his top sales performers from his prior company along with the former head of sales engineering. This was great as it helped us fill out the team below the VP-level and brought the company known quantities who had worked with the VP Sales successfully at other companies. Another portfolio company brought on a great VP Engineering who brought 3 of his top guys with him. In each case, both VPs had a few people willing to follow them to the next opportunity. It is obviously a great sign when this happens. It shows me that someone can build a team, engender loyalty, and perform at a high and successful level. Every company or investor may have a different definition of an A-Player but one thing I can say for sure is that hiring an A-Player does not necessarily mean you have to hire the "big name" or "proven all star" in the industry. Many times, I have found A-talent from up and comers who are stepping up into a bigger role, have something to prove to themselves and the world, and just have incredible will and drive to make things happen. Of course, they have to possess the prerequisite industry experience, proven track record, etc. but the intangibles often make a big difference. In the end, great people like to work with other great people.

]]>http://www.beyondvc.com/2004/06/the_aplayer_dom.html/feed1Web-based businesses circa 2004http://www.beyondvc.com/2004/06/web_businesses_.html
http://www.beyondvc.com/2004/06/web_businesses_.html#commentsWed, 02 Jun 2004 09:46:23 +0000http://localhost/wp_beyond/?p=330I met with Dave Panos and Andrew Busey of Pluck yesterday to learn more about their product and their company. Rather than go into the software (which I really like btw, combination RSS reader, bookmark manager, and simple collaboration tool), I wanted to share some of our thoughts about consumer-based web businesses circa 2004. We had a nice discussion about why it was different to launch a web-based business in today's world versus the bubble period. It was even more interesting considering that Dave and Andrew were on their third or fourth startups, depending on how you count. Our conclusion was that it is so much easier and cheaper to build a web-based business today than in the early days of the Internet. OK, I am being master of the obvious, but I am interested to see what else you can add to the list below.

1. Critical Mass During the bubble period, the promise and potential of the Internet was all around us. However, the critical mass was not there. Today, we have critical mass, a number of users that are experienced with the web. We have real broadband penetration (although not as high as Korea, for example). This obviously allows any new company to actually build a real business with real users that can throw off cash flow.

2. Technology/Experience In the early years, people did not have off-the-shelf components and open standards like XML/SOAP to build web-based applications. If you wanted to build a chat program, you had to build the whole thing from scratch. In today's world, you can pull an off-the-shelf component from an ISV or from the open source community, Jabber for example, and have chat instantly integrated in your product. Additionally, the developers 8 years ago were pioneering new applications and a new language. If you combine that same developer who is now seasoned with better technology, you get a great headstart in building new products. What used to take months now takes weeks to build. What used to cost millions now now costs a fraction of that. We have more capability built into the browser. Pluck and Onfolio, for example, are built and integrated into IE instead of being a separate application. We have toolbars galore built into IE. It works.

3. Business models Andrew stressed the other main point which is that we know what business models work today versus yesterday. Paid search didn't exist years ago. Today it is a multi-billion market. Portals were nowhere close to profitable and today they are. Companies like Yahoo, Google, Amazon, and EBay have become big enough to build a business around-they have an ecosystem-they are the gorillas of the web and entrepreneurs can launch products around them. Additionally, we know how to reach users better and measure success. We are not throwing money away on stupid advertising campaigns. The smart and seasoned entrepreneurs now have more outlets for guerilla marketing (blogger community is a new and great one).

Remember the old adage that pioneers get arrows in their backs? Well, many early entrepreneurs did fail. Luckily, today's entrepreneurs have the hindsight and ability to soak in all of the expensive lessons learned from the past. Now that is a tremendous advantage, one that will only get better with time.

]]>http://www.beyondvc.com/2004/06/web_businesses_.html/feed5It’s tough being a CEOhttp://www.beyondvc.com/2004/05/its_tough_being.html
http://www.beyondvc.com/2004/05/its_tough_being.html#commentsSun, 23 May 2004 07:50:00 +0000http://localhost/wp_beyond/?p=332Jerry Colonna has an insightful post on what it's like to be a CEO of a venture-backed company. Having worked with Jerry on a board before, I find his advice quite practical and thoughtful. One takeaway from his post is about being overcommunicative with your board meaning that VCs do not like surprises. I totally agree as I've written about this before.]]>http://www.beyondvc.com/2004/05/its_tough_being.html/feed0Don’t overhype your companyhttp://www.beyondvc.com/2004/05/dont_overhype_y.html
http://www.beyondvc.com/2004/05/dont_overhype_y.html#commentsWed, 19 May 2004 11:24:27 +0000http://localhost/wp_beyond/?p=334It is on the newswire today-Cometa Networks, the wi-fi service provider backed by IBM, AT&T, and Intel, is shutting down. There is much analysis out there discussing the merits of the business and what went wrong. In a recent News.com piece, analysts discuss how Cometa did not build critical mass quickly enough to make the economics work. Rather than focus on what went wrong, what strikes me about Cometa Networks is not the business or market it was going after, but the hype and attention it drew to itself way before its service was even in operation. It was all over the news (well done, by the way), but the problem is that it promised too much and never delivered. At the very least, if you are going to hype yourself, make sure you can deliver relatively quickly to capitalize on the buzz. When you have a grandiose launch you set high expectations for your company. As my colleague, Ben Tanen, put it, "they would have to be the next generation phone company" to deem their execution worthy of their launch. Anything short of that and they would be deemed a failure. Of course, this puts a ton of pressure on the team to deliver and exceed expectations. Along those lines, it even seems that the company was quite aggressive in its dealings with business partners, acting like a market leader even without a network (see Sky Dayton's comments on wifinetnews). Call me understated, but I prefer my companies to "underhype and overdeliver" rather than "overhype and underdeliver." So whether Cometa was a victim of the market or not, the way it was launched, one could claim it was a victim of its overambitious start. Even if they succeeded bit by bit they would have been seen as an underperfomer as it would have taken them years and a ton of capital to meet the hype that they generated from the initial launch. ]]>http://www.beyondvc.com/2004/05/dont_overhype_y.html/feed0Insights from a recent CIO meetinghttp://www.beyondvc.com/2004/05/this_month_seem.html
http://www.beyondvc.com/2004/05/this_month_seem.html#commentsThu, 13 May 2004 10:53:25 +0000http://localhost/wp_beyond/?p=337This month seems to be my month for CIO meetings. Part of a VC's job besides helping management with strategy and hiring people is to help with customer introductions and strategic partnerships. In this tough market, my partners and I have been doing our best to help along these fronts. While being in New York can be a disadvantage in terms of finding new companies and hiring great industry people, it is great for our access to customers and the Fortune 500. In New York, we can keep a close ear to the ground and learn about spending priorities and other short and long term problems that CIOs need to solve. This is yet another data point we can use to help us place our bets. I met with another CIO yesterday in the financial services market and thought you would be interested in hearing a few tidbits from the meeting.

1. IT Budgets are loosening up across the board for capital expenditures and people-lots to do, he is looking to hire people for the first time in a couple years, although he does not want to hire too many people if the market collapses in 6 months.

2. IT Priorities-one of the big areas of new spending will be for technology that supports revenue creation instead of cost cutting. For example, this includes making sure that the trading systems can keep pumping out transactions-there is alot more volume today with the market coming back and they have not upgraded their systems in a couple of years when they either overbought or were oversold too much technology. In addtion, his firm wants to upgrade existing applications (many run in old perl scripts and mainframes) and put them on a new application infrastructure like J2EE. Other high priority categories include business continuity/disaster recovery and security, which is not a surprise.

There was nothing earth shattering about this meeting except it does confirm my belief that spending is increasing and that CIOs are starting to look at expenditures that will help generate revenue for the first time in awhile. In addition, it seems that given his priorities, larger IT vendors like Dell, EMC, BEA, and Sun would benefit from his increased spend. As usual I spent some time pitching my companies and the first question he asked after each pitch was, "What other financial service customers do you have?" This is not unlike any other meeting with a CIO and just reminds me how hard it is for a startup to get its first, high-profile, referenceable customer as no one wants to be a guinea pig. Secondly, it shows how important it is to find the early adopters in a particular vertical and make them referenceable so their peers can follow. CIOs spend alot of time these days managing risk not taking on risk.

]]>http://www.beyondvc.com/2004/05/this_month_seem.html/feed1Transitioning from a service business to a product-driven companyhttp://www.beyondvc.com/2004/05/be_careful_of_c.html
http://www.beyondvc.com/2004/05/be_careful_of_c.html#commentsWed, 05 May 2004 16:36:56 +0000http://localhost/wp_beyond/?p=341It has been awhile since my last post as I have been busy with board meetings. In addition, I met a number of interesting companies, a couple of which were service businesses in the process of transitioning their models to become product-driven software companies. It is a familiar formula to many out there. More often than not, the principals of a service business may have developed expertise and a network in a particular industry, developed a solution for a customer, and decided that they could resell it multiple times turning their business from a service one to a more scalable product-driven company. This makes a ton of sense as the entrepreneur gets to understand a particular market and pain point for customers. In addition, the early stage business gets the customer to pay for its initial product development. Having met with a couple of these types of companies this week, it reminds me to issue a few cautionary warnings for entrepreneurs:

1. Just because one customer wants it does not mean you have a big market opportunity-do your homework to make sure the customer's pain is not unique and that this is not a custom development job

2. Have one version of your product, not one for each customer-I have seen a number of companies that claim they are a product-driven business with 5 customers when in reality they are still a service shop because their customers all have different versions of a product.

There is one company that my team met with a couple of years ago that had a marquee list of customers, all of whom had license deals greater than $300k. However when we did customer reference checks and deeper due dligence on the technology, we learned that all of the customers had different versions of the product. We ultimately passed on the deal as it was quite evident that the business had not made the full transition to a product company. I recently caught up with the former VP Engineering who was looking for a new job. In discussing why the company failed, this is what he basically had to say. While the company had great customers, the support costs associated with supporting 3 different versions of a product killed them. He had to spend too much of his team's team fixing problems for the installed base rather than devote most of his resources developing the next generation product. Consequently, their product suffered and did not meet the demands of the wider market.

While turning yourself from a service company to a software business may be a good idea, be extremely careful about the customers you sign and remember to make sure that you really have one product not multiple, custom platforms because that can kill you in the long run.

]]>http://www.beyondvc.com/2004/05/be_careful_of_c.html/feed1Founder transitionhttp://www.beyondvc.com/2004/04/founder_transit.html
http://www.beyondvc.com/2004/04/founder_transit.html#commentsThu, 22 Apr 2004 15:06:53 +0000http://localhost/wp_beyond/?p=343There are a number of good posts about founder transition in light of the recent changes at Friendster and Plaxo. If you are an entrepreneur, I suggest reading Ross Mayfield's words of wisdom on this topic. What makes it so interesting is that Ross is a founder, was replaced at a prior company, and is back again as CEO of another company, Socialtext. As Ross says,

Not a day goes by where I don't brace myself for this change. As a CEO and Founder of an early stage company, I know new stages will come. I constantly question myself if I'm the best person for the job, because the company is more than just me. Its a source of livelihood, investor return and customer bliss -- all of which improve over time. I am really darn good at this stage of the company and have proven it in the past. I hope to test my capabilities at latter stages, but also recognize that the day may come where regardless of my ability to lead, manage and deliver -- environmental forces may call for the new.

As a VC, we always like to have an open and honest discussion pre-investment about what the entrepreneur expects from us, and what we expect from the founding team. When discussing the idea of transition and building the right team, we learn alot about the founders and what drives them. This does not necessarily mean we will replace the founder with a new CEO, but it is a great way to understand what motivates the founder and how committed they are to creating a successful company, not a one-man show. Some simply want to be CEO come hell or high water-we take a pass on those opportunities. Some tell us what we want to hear, but their body language tells us otherwise-they tense up and there is no positive feeling behind their words. Others like Ross tell us what we want to hear and internalize it. They know the drill and want to be given the opportunity to run the show and prove that they can do the job but at the same time understand that change may happen. These are the founders in which we like to invest.

]]>http://www.beyondvc.com/2004/04/founder_transit.html/feed2What aisle/what shelf?http://www.beyondvc.com/2004/04/what_aislewhat_.html
http://www.beyondvc.com/2004/04/what_aislewhat_.html#commentsTue, 20 Apr 2004 14:07:30 +0000http://localhost/wp_beyond/?p=344I met with an entrepreneur this week who had a fantastic background and great technology. However, it was a technology in search of a problem to solve. Why? Because he could not readily answer some fundamental questions like what problem are you solving, who is the buyer of the product, and what is the amount of pain the buyer has without your product or solution. This is a problem that I see time and time again. Additionally, many entrepreneurs cannot answer the question, "what aisle, what shelf?" When you go to a supermarket you know that you go to the condiment section to find ketchup, mustard or BBQ sauce. On those shelves, you will find different types of condiments and different brands organized in a way that makes sense. While on any given visit you may see new products on those shelves, they are still condiments. Similarly, your sales prospects need to know where your product fits to determine where you come out of the budget and who is responsible for evaluating new solutions. If you try to create a brand new market category that no one understands simply that will not work. Similarly you do not want to sound like everyone else.

Going back to our earlier analogy, while you want to find a large enough aisle to put yourself into, the struggle is expressing your uniqueness in the 30 second elevator pitch. You do not want to be a "me-too" product lumped in with 30 other companies. If not done correctly, you could end up being thrown into the general data integration, security, or performance management pile. 2 approaches I have seen include defining your own category (aisle) or your own sub-category (shelf). Doing the former is riskier and more expensive (defining a new market is not cheap), while offering the opportunity for outsized returns. More often than not, entrepreneurs with great technology feel like they have to create a distinct new category, and many times they end up creating a market that no one understands or cares about and one in which their dollars come out of the experimental IT budget-not a large bucket or great place to be. It takes time for a new category to become a budget line item. In my opinion, creating a subcategory is easier, gives a company the opportunity to express its uniqueness, allows the sales prospect to understand generally where your product fits in the budget, and still does not prevent you from creating your own category (aisle) in the future. While this may all sound very basic, I would not go pitch a customer or VC without having this nailed down.

]]>http://www.beyondvc.com/2004/04/what_aislewhat_.html/feed1Great business modelhttp://www.beyondvc.com/2004/04/new_business_mo.html
http://www.beyondvc.com/2004/04/new_business_mo.html#commentsFri, 16 Apr 2004 12:18:34 +0000http://localhost/wp_beyond/?p=345OK, so times have been tough in the IT market over the last couple of years. Luckily, it is starting to get better. For those of you who understand that selling IT software to enterprises is not easy, I thought you would enjoy this email from one of my portfolio companies regarding differentiation and "secret sauce."

As X and I have been trekking around Sand Hill Road, and everywhere else venture funds are located, we’ve really paid attention to the issues of differentiation and “secret sauce”. As such, we’ve decided that our company needs a dramatic shift and we have found the answer. We worked on the plan at San Jose airport last night, watching the behavior of customers for this exciting new product. It was reconfirmed this morning as I left Starbucks.

Our company is going to get out of software and information technology completely. No, we are not mad, well, we may be, but that has nothing to do with this discussion. We are going to take the most plentiful resource on the planet, put it in handy plastic bottles and sell it for about $4 per bottle in airports and other convenient locations; but if you choose to buy it from your local grocery store by the case, it will only cost and $4 for a case of either 12 or 24 bottles – purely based on random decision making. This market has been validated by at least 50 other companies, who reap millions of dollars of profit from this market place each month. Our “secret sauce” will be the label – yes, it will be our company name and logo that will differentiate our product from Evian, Vasa, Fiji, San Pelegrino and those many other indistinct brands.

We look for your support at the next board meeting to make this dramatic shift in our company’s strategy!

Please scroll down for some final thoughts!

Can you imagine presenting the idea of bottled water to VC? We of course thought about it after X and I bought two frozen yogurts and 2 bottles of water for $12! Not only wouldn’t we consider drinking airport tap water, we bought bottled water with a name, Vasa, that would make one think it came from Germany – why would I buy water from Germany? I totally cracked up leaving Starbucks (there’s another one!) with my $3.60 non-refillable cup of coffee as I saw a case of water for $3.99 outside a grocery store!

Have a nice weekend everyone!

]]>http://www.beyondvc.com/2004/04/new_business_mo.html/feed0Thoughts from PC Forum-going into attack modehttp://www.beyondvc.com/2004/03/pc_forum_2004tu.html
http://www.beyondvc.com/2004/03/pc_forum_2004tu.html#commentsTue, 23 Mar 2004 12:02:00 +0000http://localhost/wp_beyond/?p=357Once again, I am not going to blog the panels at PC Forum, but you can find some good commentary on the conference via other bloggers from my post yesterday. Other good posts can be found from Dan Gillmor, Jason Calacanis, or the PC Forum Eventspace.

However, what I would like to share with you is some conversations I had with some VCs and entrepreneurs over the course of the day yesterday. While the panels are interesting and the speakers can stretch your mind, what is great about PC Forum is the high-level networking that occurs during the day. So what did we talk about? There were a number of attendees who were here during the past few years and their businesses raised a fair amount of capital and somehow they managed to survive the nuclear winter during the 2001-2002 period. What allowed them to do it? What are the challenges they face now? One observation that I discussed with some others is that the very principles that made companies successful during the bubble period are the very ones that would land you in bankruptcy court during any other business period. Some of these principles included growing revenue and headcount at all costs with no focus on profitability and spending tons of money on building a larger than life image-lots of money thrown at PR firms and advertising with no idea of who your target market was or what your customer really wanted. In other words, alot of these companies were based on cool technology and not on making customers happy. On top of this, VCs threw too much money at these companies and there was no need for entrepreneurs to be resourceful and creative in order to get things done.

Let's fast forward to now. The companies that survived this downturn were excellent at cutting costs, repositioning their products for new markets, and being resourceful and creative to survive. While these are some of the business principles I want my companies to continue to adhere to, I also want to caution that there is a danger in being too cheap. Some of these companies were so shellshocked from what happened during the past couple of years that they have become too cautious. For anyone that has been through the tough years, the only thing I can say is congratulations for surviving but now it is time to take some calculated risks. It is time to get out of the bunker and go into attack mode. Go after your competition, take some calculated risks, and focus on creating some revenue growth. What is different now than before is that most companies that survived the nuclear winter know who their customer is, how much they will pay, and what features and functionalities they may want in future versions. While it may sound like idle VC talk, I encourage you to spend that extra $$$ now as long as you can see the real ROI behind a targeted marketing program, the hiring of a new engineer to finish a product faster, or a new sales person to manage more qualified leads. Once again, take it with a grain of salt, as some entrepreneurs may think this is another VC swinging for the fences, but the point is don't be too cautious because the opportunity may just pass you by.

]]>http://www.beyondvc.com/2004/03/pc_forum_2004tu.html/feed2PC Forum 2004-Monday morninghttp://www.beyondvc.com/2004/03/blogging_from_p.html
http://www.beyondvc.com/2004/03/blogging_from_p.html#commentsMon, 22 Mar 2004 16:13:00 +0000http://localhost/wp_beyond/?p=358PC Forum is off to a great start this year with an interview with Eric Schmidt from Google and a panel with the CEOs of AOL, Yahoo, and Google. I do not plan on taking detailed notes so I suggest you view Ross Mayfield's blog and posts to stay current on the conference. I also suggest visiting David Weinberger and Brett Fausett for more notes.

With respect to the first panel, I took some interesting notes on spam. AOL and Yahoo are doing all that they can to stop spam, catching high 90% of it. The frightening aspect is that the high amount of spam that you do see is only the 4-5% that is not filtered. AOL gets 2.7 - 3 billion spam messages per day which is trying to get into their system. Not a surprise that spam is a huge issue, but these numbers are. No one claimed to have a silver bullet, but rather advocated the use of multiple ways to overcome this issue.

Bruce Schneier had some interesting comments on the security and risk panel. Specifically, Bruce said that security is social and not about technology. Yes, there are technical causes and solutions for security but it is irrelevant if the social and economic model are not fixed. For example, there are plenty of spam filters out there but we still get tons of spam. The economics work for spammers. For users, it comes down to balancing security with the cost to mitigate the risk. People will make decisions based on economic value and cost. I totally agree here.

Next up was the CIO panel (Dawn Lepore, former CIO of Schwab, Shai Agassi, SAP, and Rafael Sanchez, Burger King). Dawn Lepore said that software is one of the biggest issues for CIOs. It is complex and costs are excalating tremendously. Software vendors and customers are diametrically opposed as the software vendors want to lock-in customers and the customers want flexibility. How does seeing an architecture diagram where the vendor's products are in 12 places in a stack solve her business problem? Given this tension between vendors and proprietary lock-in, it is no surprise that open-source and open-platform technology and new business models like the hosted or subscription sale are spreading rapidly. The more you hear the panel talk about technology and the job of the CIO as being a risk manager, you can clearly see why it is so hard for an early stage company to land a big customer. Who wants to take the risk of buying a new technology from a new vendor? Yes, it happens but it is not easy.

I guess it is not a coincidence that a number of companies floating around sell to/service consumers as the first target market-companies like Onfolio, Eurekster, and Datapod.

]]>http://www.beyondvc.com/2004/03/blogging_from_p.html/feed0Staying close to your customers with blogs and RSShttp://www.beyondvc.com/2004/03/in_a_response_t.html
http://www.beyondvc.com/2004/03/in_a_response_t.html#commentsWed, 10 Mar 2004 14:29:51 +0000http://localhost/wp_beyond/?p=362As I have said a number of times, I am a big believer that companies should start looking at how to use new technology and standards like blogs, wikis, and RSS/Atom from a product perspective and not solely for news publishing and aggregation. What do I mean by that? In response to a post I wrote about why I blog as a VC and the benefits of it, Brandon Wirth sent me a link to a piece he wrote about the future of customer relationships. In it, he summarizes by saying:

In the very near future there will be a trend to use Social Networking to create product communities. This will replace focus groups, and market research trends of today with direct interaction with those most likely to buy a given product. This is the American Idol for big business. Instead of trying to pick what the best solution is and betting the farm on it, you let the market pick a winner for you and they will already love the product before they have it. The focus becomes on the end user. They feel ownership in the creation of the product, and already know they want it.

Not sure I agree on the "American Idol" for big business, but the point of staying close to the customer is an important concept. I certainly see a world where companies use new technology and standards like blogs, wikis, and RSS to build a relationship with its users and to empower them to participate in a company's success. This conversational based approach to dealing with customers is a great and EASY way for companies to share information on new features and releases and get constructive feedback on their products, receive new ideas, and frankly hear about the gripes. All this should help companies build a better relationship with customers and gather real-world data. While the example Brandon uses is a consumer one, I also greatly believe that this applies to infrastructure software as well. As I mention in an earlier post, it is too easy for companies to get enamored about their technology and to forget that end users need a great experience. Building fanatical user communities is not a new idea, but the point is that new standards and technology make it easier for companies to create, manage, and leverage them in a frictionless and organized way.

Along these lines, Jeff Nolan just put up a new post on his LinkedIn experiment. And in it, he praises Reid Hoffman, CEO of LinkedIn, for paying attention to blogs and dealing with Jeff's experiment in a highly positive way. I encourage reading this post as Jeff has some great comments on how companies can deal with bloggers and why it is another important source of information and feedback.

]]>http://www.beyondvc.com/2004/03/in_a_response_t.html/feed2Hiring Talented Sales Peoplehttp://www.beyondvc.com/2004/03/hiring_talented.html
http://www.beyondvc.com/2004/03/hiring_talented.html#commentsFri, 05 Mar 2004 11:30:55 +0000http://localhost/wp_beyond/?p=363As you can see, I have been spending alot of time with my portfolio companies hiring in a number of functions to create growth. That is obviously a good sign. Hiring is such an important skill, there is no science to it, but research and common sense help. I am sure you remember the old adage, hire slow, fire fast. Anyway, when it comes to sales people, let me give you a rule of thumb-never hire sales people that have stuck around in a declining business for too long. Any sales person worth his weight wants to be where the action is, and if the company is not growing, the TALENTED PRODUCERS ALWAYS LEAVE FIRST. It may sound like I am being master of the obvious, but sometimes it is hard to remember this, especially since many sales people interview well. Do your research on their background and the companies at which they worked. Be extremely careful about the candidate that rode a company from $40 million of revenue down to $10 million because you can bet that if the guy was hungry and talented, he would be somewhere else!]]>http://www.beyondvc.com/2004/03/hiring_talented.html/feed4Building your business around customers (continued)http://www.beyondvc.com/2004/03/building_your_b.html
http://www.beyondvc.com/2004/03/building_your_b.html#commentsTue, 02 Mar 2004 12:05:44 +0000http://localhost/wp_beyond/?p=364Forgive me for being obsessed with customers, but after all, without them, how can you have a business. Anyway, I was interviewing a VP of Engineering candidate for one of my portfolio companies, and when I asked a question about the most significant lesson that he learned from one of his prior jobs, this was his thought-while the core technology is important, focus on providing the customer with an unbelievable user experience straight out of the box. What will the customer see and touch first. Start with the installation process. Make your product the easiest to install. If it goes smoothly and quickly, if you can do it plug and play or remotely, the customer will already begin to have a pleasant experience with your product. Make the GUI as user-friendly as possible. If it is as intuitive as using your email or browser, then it will make it easy for the customer to get the team using it with minimal training. Finally, make it easy to manage. Have a nice management console that allows an end user to administer the system, update it, and manage multiple licenses as simply as possible. So while having great underlying core technology is important, everyone will be selling technology and features and function. What many companies forget early on is that having a great customer experience can provide real differentiation and can often mean the difference between success and failure in competitive markets. As for the VP of Engineering candidate, he is on the shortlist as it nice to see someone with the experience to build product and manage teams but also think from a business-oriented perspective]]>http://www.beyondvc.com/2004/03/building_your_b.html/feed2Demo Day 2-@Home/Collaborationhttp://www.beyondvc.com/2004/02/demo_day_2home.html
http://www.beyondvc.com/2004/02/demo_day_2home.html#commentsTue, 17 Feb 2004 11:37:11 +0000http://localhost/wp_beyond/?p=367The morning is off to a great start with a few home networking/digital media boxes for consumers. The battle for the home is in full swing between MSFT's vision of the PC as the gateway to the home and companies like Akimbo, BravoBrava!, and Molino Networks bringing full digital media management to the set top box. It is truly quite amazing how much functionality continues to be added to these consumer devices, and how easy they make it for the consumer to view, listen and share their CDs, DVDs, downloaded video, and pictures. See Jeff Nolan's blog for more information. If I were Microsoft and Tivo I would be worried.

One of the problems with collaboration via Webx and Placeware is that it is still not easy to use, the pricing is not friendly, and it requires users to schedule meetings in advance. Today's companies, Convoq, Sightspeed, and GoToMeeting (Expertcity-a portfolio company) are all designed to allow users to take advantage of the daily, ad-hoc and spontaneous meetings that are not currently captured by the incumbents. Not only do they bring disruptive technology to the market making it incredibly simple to organize meetings and web video conferences but also disruptive pricing to increase usage. So if I were Webx and Placeware, I would keep an eye out for these companies which will allow users to host unlimited meetings for fixed monthly costs.

]]>http://www.beyondvc.com/2004/02/demo_day_2home.html/feed0Demo Day 1 Recaphttp://www.beyondvc.com/2004/02/demo_day_1_reca.html
http://www.beyondvc.com/2004/02/demo_day_1_reca.html#commentsMon, 16 Feb 2004 21:00:08 +0000http://localhost/wp_beyond/?p=368Day 1 is about over and after having sat through a number of interesting pitches, it is funny to hear the PR folks saying that many of the journalists are more interested in consumer/web-oriented companies than the enterprise-related businesses. Has the pendulum swung back to the consumer and web? It seems to me that home entertainment, wifi networks, and blogging are all the rage these days. And yes, they are hotbeds of innovation. Recently enough, the idea of VCs getting excited about the web/consumer area was contrarian, and now I am sensing it is not that way anymore. OK-I loved alot of the discussion in the morning and the agile enteprise afternoon session wasn't as enlightening as I hoped, but there were definitely some interesting companies that presented. One is Metapa (full disclosure-a portfolio company) which is bringing the power of commodity computing (Lintel) to the data warehousing market allowing companies to realize 10-50x price performance over the standard Teradata, Oracle, IBM and Unix $1mm+ systems. Another interesting company was IMlogic which has a platform to allow you to integrate existing enterprise applications with IM. ]]>http://www.beyondvc.com/2004/02/demo_day_1_reca.html/feed0Demo 2004http://www.beyondvc.com/2004/02/demo_2004.html
http://www.beyondvc.com/2004/02/demo_2004.html#commentsMon, 16 Feb 2004 13:06:34 +0000http://localhost/wp_beyond/?p=369I am at Demo 2004, and it is great to feel the positive buzz in the room. There are lots of VCs and press in attendance, and it is clear that entrepreneurship is alive and kicking. In fact, it never went away as a number of companies that presented in the morning have been around for a few years. Hopefully, I will get a chance to post on some interesting companies and technologies that I see but for now please stay on top of Demo through Jeff Nolan's Day 1 posts.]]>http://www.beyondvc.com/2004/02/demo_2004.html/feed0Tapping the Chinese marketplacehttp://www.beyondvc.com/2004/02/tapping_the_chi.html
http://www.beyondvc.com/2004/02/tapping_the_chi.html#commentsTue, 10 Feb 2004 11:04:12 +0000http://localhost/wp_beyond/?p=371While tapping the growth of the Chinese market sounds like a good idea, a fellow VC who just got back from a trip to Beijing and Shanghai says he completely understands why his companies are not getting any real traction in that market. Besides the highly politicized nature of business, there is a pervasive "catch me if you can" philosophy inherent in the economy. Think about it-moving from a world where the state owned all enterprises to a hybrid form of capitalism is not easy. In the past, it was always the people versus the government, and therefore there was little respect for financial instruments like debt. It did not matter if you defaulted because you would be bailed out anyway. Extend this same thinking on debt into the private market, and you get a system that does not function well. Therefore alot of business is done cash on delivery as business credit does not exist. Throw in lax IP laws and the fact that China is thousands of miles away from the US and you get a difficult market to operate your business. So the next time someone tells you that they will get x% of the market in China, remember how difficult it really is to operate in a far away land with different rules of engagement in the business world. This will obviously get better with time.]]>http://www.beyondvc.com/2004/02/tapping_the_chi.html/feed0Building your business around customershttp://www.beyondvc.com/2004/02/building_busine.html
http://www.beyondvc.com/2004/02/building_busine.html#commentsThu, 05 Feb 2004 10:13:49 +0000http://localhost/wp_beyond/?p=372Fred Wilson has a great post about building a "customer-obsessed company" as opposed to a "technology-obsessed company." This is good advice and reminds me of a number of companies built during the bubble period which were technology companies in search of a problem to solve. For early stage companies building their business, some of Fred's advice includes investing "in the customer facing side of the business and in particular account management and customer service which are the "eyes and ears" of the organization and in product management (the "soul" of the organization) to synthesize this feedback into new and better products." One important point when working with customers is to make sure that you do not support too many "one-off" requests. You must be extremely careful to make sure that the features and fuctionality that you build are "market-driven" meaning a number of customers or prospects support them versus one-off deliverables.

I was just at a board strategy session with one of our new investments where we are in the process of ramping up the business. As we reviewed the 2004 budget and dove into the technology department and product deliverables for the year, it was clear that the developers were getting pulled into many different directions. This is a common problem. Many companies that bootstrap their businesses tend to have developers acting as presales support, post sales support, and customer service. Every second a developer is out helping with a customer is a second not focused on advancing the product. Every second a developer is coding is time not spent answering customer support issues. As you ramp, this is not an ideal solution. So our recommendation was to make sure that the company created a separate presales group/sales engineering group to work with the sales team and to make the investment now to create a separate customer service organization to build for the future. As Fred mentions, too many companies overlook the customer support side of the business. Many times, putting the right customer support processes and organization in place early can mean the difference between success and failure.

And yes, product management is an incredibly important role to fill early on in a company's life. This function should serve as the intermediary between market and customer requirements and engineering. If you have someone too close to sales performing this function, you may end up with a focus on short-term results where too many one-off requests are made to just close a deal. If your engineering handles this, you may end up with an over-engineered product that does not meet customer needs. Your product person should be in marketing with significant experience balancing the short-term and long-term needs of the various stakeholders. This includes gathering data from customers (direct meetings, customer support, sales team), prospects, analysts (yes it is a necessary evil), and your own team to prioritize the product "must-haves" for the next release.

]]>http://www.beyondvc.com/2004/02/building_busine.html/feed1The VC/entrepreneur relationshiphttp://www.beyondvc.com/2004/02/vcs_dont_like_s.html
http://www.beyondvc.com/2004/02/vcs_dont_like_s.html#commentsMon, 02 Feb 2004 06:00:00 +0000http://localhost/wp_beyond/?p=373Many of you have heard the analogy that the VC due diligence process is like dating and getting the investment is akin to being married. For all of you in relationships, you also understand that honest and open communication is one of the keys to success. Similarly, the VC and entrepreneur relationship should be built on the same foundation. Trust me, I know when one of my portfolio companies closes a new and important deal because good news always travels fast. However, bad news does not travel so fast. I urge the entrepreneur to share the bad news just as quickly as the good news. Why? If you tell the VC sooner rather than later, we can help. If you have an experienced VC as an investor, you can bet that he has seen the movie before and at the very least can offer advice and words of wisdom to help you in your decision making process. If you wait for the board meeting, it is too late for us to have any impact. Secondly, VCs don't like surprises. Err on the side of too much communication initially than too little. Sure, we won't be happy with bad news. We're even unhappier about bad news when we are told at the 11th hour with no ability to influence the decision. You can tell alot about your VC by his demeanor when confronted with tough and unexpected negative situations. In fact, in your investment process, ask yourself this question, "When things are going bad, is he going to roll up his sleeves and help or simply yell and bark orders." As Clint Eastwood said in the movie The Good, The Bad, and The Ugly, "There are two kinds of people in this world. Those with loaded guns and those who dig. You dig." Hopefully, you won't have the VC with the loaded gun, but rather the one who will pull out a shovel and help.]]>http://www.beyondvc.com/2004/02/vcs_dont_like_s.html/feed0Sales Forecasting-a blend of art and sciencehttp://www.beyondvc.com/2004/01/sales_forecasti.html
http://www.beyondvc.com/2004/01/sales_forecasti.html#commentsTue, 20 Jan 2004 13:24:50 +0000http://localhost/wp_beyond/?p=376I was quite frustrated recently when one of my portfolio companies presented the board with a 2004 revenue forecast which was not based on reality. While I am not a sales expert or spreadsheet jockey, there are 2 important factors to consider when building a sales forecast-ground it in reality and use a handful of simple assumptions so you can manage your key resources, people and cash, appropriately. Yes, there is always a mysterious aura about forecasting sales, and it is alot of art, but to the extent you can bring some science and process into it, the better off you are. Many companies subscribe to certain methodologies to better quantify a sales pipeline such as Solution Selling or Targeted Account Selling. What I do not like are percentage closing numbers randomly assigned to prospects where a number like 80% probability of closing has no defined criteria and differs deal by deal based on feel. Here are a few simple assumptions I like to see that drive the sales forecast:

1. Number of sales people 2. Quota per sales person (usually overassign 10-15%) 3. Average Selling Price (ASP)-in today's market, you may see a small pilot deal followed 3 months later with a much larger sale (model this appropriately). If you take 2/3, you get an approximate # of deals you expect each sales person to close annually 4. Sales cycle-how long does it take to close a deal 5. Time for a sales person to be productive (usually around 4-6 months depending on maturity of product and market) 6. Lead generation-how many new leads per month and what % becomes qualified leads

Too many assumptions and drivers in a model make it too complicated and too hard to use as a management tool. It should be easy for you to add a sales person, change the ASP, etc. and see how it impacts your sales. To ground it in reality, I like to take a step back from the bottom-up approach listed above and take a top-down view. For example, does this company have the resources to go from $1m to $4mm of revenue or from $5mm to $10mm? Is the market ready for this? Where will it get the leads? Is a $2mm quota for a missionary sale and market realistic based on past history, looking at other markets, and using public company comparables?

One experienced VP of Sales told me that he likes to have a 3-4:1 coverage in his pipeline of 80% and above deals going into a quarter. Of course, the definition of 80% depends on what sales methodology you use, but the point is you should have quantifiable criteria where 80% could be defined as deals where you have had multiple meetings, identified a real pain and a decision maker and a budget, defined a decision making process, and feel a strong probability of closing by the end of the quarter. That way, if a potential customer delays a purchase for whatever reason, you have 2-3 others that could potentially replace it. In addition, you have some good visibility for the next quarter. While many early stage companies rarely achieve pipeline coverage like that, the important point is to run the numbers and ground them in reality. Also, be realistic and harsh about your pipeline. Throw out the garbage, the deals that have just hung around for a long time and have no momentum.

More often than not, management teams tend to put an overoptimistic pipeline in front of the board thinking a larger pipeline is better. I would rather have a higher quality, filtered pipeline that is well scrubbed than a larger pipeline with no meaningful criteria to move deals along in the sales process. With the former, we all have a real tool that can help us better manage our resources.

]]>http://www.beyondvc.com/2004/01/sales_forecasti.html/feed2Companies are bought and not soldhttp://www.beyondvc.com/2003/12/besides_taking_.html
http://www.beyondvc.com/2003/12/besides_taking_.html#commentsTue, 23 Dec 2003 11:07:03 +0000http://localhost/wp_beyond/?p=383Besides taking a brief time out to celebrate the Expertcity deal, I have spent a fair amount of time interviewing VP candidates for one of my portfolio companies. As with any smart executive who cares about the value of equity, the question I am often asked is, "What is your exit strategy." My answer is quite simple-every company we invest in must have IPO potential (IPO potential as defined by non-bubble metrics) but along the way if someone makes an offer for the company because it is an attractive, rapid growth business, we can evaluate it appropriately. What we will not do is invest for the sole purpose of having a company acquired. That is a losing proposition. The ultimate way to create value is to have a real business with real cash flow and a strong balance sheet where you can show your potential acquirer that you do not need any other sources of funding besides self-sustaining growth. VMWare certainly used this approach when it decided to sell to EMC. You have to be able to show your potential acquirer that they are not the only way to create liquidity for your business.

Companies are bought and not sold. What I mean by that is good exits usually happen when someone tries to buy your company rather than you trying to sell your company. In other words, these good exits usually happen when your company is approached by a potential buyer-i.e., you are seen as desirable in someone else's eyes rather than you telling someone how pretty you are. Typically, these types of exits result from already existing, revenue-generating business relationships. It is not that big of a leap for an aquirer to make an acquisition offer on the higher end of a valuation range knowing how its partner does business, how the management teams work together, and how the product sells through to its customers. Other times it can happen when your company consistently beats out a competitor in the market and is seen as a thorn in the side. In either case, your company is a known quantity and the potential acquirer has seen you perform in the market.

What does this all mean? My advice to entrepreneurs and management is quite simple: if you focus on what you can control (growing and managing your business), then the external factors (exit strategy) will take care of itself. However, if you try to force it and shop your company, that shows a sign of weakness and more often than not will result in a fire sale. Remember, companies are bought and not sold. If you do not get the price you want, it will not matter since you have a business built for the long-term. For a strong, well manged company, opportunities will always present themselves.

]]>http://www.beyondvc.com/2003/12/besides_taking_.html/feed1Software packaginghttp://www.beyondvc.com/2003/12/om_malik_exseni.html
http://www.beyondvc.com/2003/12/om_malik_exseni.html#commentsWed, 10 Dec 2003 15:03:50 +0000http://localhost/wp_beyond/?p=386Om Malik (ex-senior writer for Red Herring) has been writing about the commoditization of hardware. In a recent article in Business 2.0 titled "The Rise of the Instant Company," Om talks about how hardware has become commoditized to the point where hardware expense as a cost of goods sold is de minimis. In other words, companies can now cobble together off-the-shelf-hardware with proprietary software to create companies that can quickly and cost-effectively go after large incumbents. This is a great point and what it comes down to is that software companies can now "package" themselves as hardware plays and successfully leverage the hardware channel from a sales perspective. This is quite attractive from a VC perspective because now we get the opportunity to invest in business that can grow rapidly like a hardware play at software like gross margins (depending on price point 65-85%).

Given this backdrop, I believe that we will see 3 types of software companies in the future. The first will be companies selling expensive applications which will rely on extensive professional services to install and customize. This is the market dominated and characterized by large companies like SAP, Siebel, Peoplesoft and their ancillary professional services partners like Accenture, IBM Global Services, and other consulting companies. The second will be companies that will sell their software as a service (ASP model). These are companies like Salesforce.com, Liveperson, and Expertcity (LPSN and Expertcity are both fund investments) which took the above market segment and made it really easy for customers to buy and in effect, removing the complexity of managing and installing the software. Finally, there will be software companies that have a componentized product that is easy to install which can and may be packaged into an appliance to leverage the channel sales model. This could mean that companies are selling their own appliance or OEMing their software to hardware vendors who in turn sell an appliance. Companies like Neoteris and Network Appliance fit this model. From a venture perspective, the sofware companies that are most interesting to me are the ones with ASP and appliance offerings. In this posting, I would like to focus on software packaged as an appliance.

While the average selling prices for companies that leverage the channel are much lower than pure, direct enterprise sales, I like the fact that these types of companies can utilize a seed and harvest model. In the seed and harvest model, companies that have lower price points can seed a number of customers with a low, entry price product and go back to them later to harvest accounts to sell multiple instances of the product. While the initial sale may not be $1mm upfront, you may be able to get $1mm in the life of a deal. The benefit for the software company is hopefully a shorter sales cycle (it is easier to get sign off for $50k vs. $500k) and the ability to leverage other people's feet to sell your product.

From a VC perspective, I like to see companies which can leverage other people's sales forces to grow. Yes, your company will give up some points in margin and also lose some control over customer relationships, but will hopefully make up for it in terms of more volume. For early stage companies, it is already quite difficult and expensive to sell into Fortune 1000 accounts. Many of the companies under the first model (pure enterprise license sales) need expensive direct sales forces which sell high-priced products which have long sales cycles. If the price point of your product is not high enough, then there is little likelihood of you ever building a real, profitable software company from direct sales alone. In addition, if you want to get the excitement and interest of service providers like IBM Global Services and Accenture, you better be able to drive $10s of millions of dollars of service revenue.

Just to be clear, I am not saying that software companies do not need direct sales forces as it is incredibly important in a company's early phase of development to own the customer relationship and gain valuable feedback about its product. In fact, no matter what kind of software company you aim to be, you need to have customers to get channel partners, know what it is like to sell to an end customer, and successfully manage an end customer in order to train your channel and OEM partners. Therefore, most companies will require some form of direct sales force to begin with, but over time, I like to see the mix of revenue moving towards greater than 50% into the channel and OEM model. What this means, at least for me, is that selling $1mm software licenses with 3-6 month installation processes is not interesting and has gone the way of the dinosaur from an attractiveness perspective in terms of funding. The fact that hardware has become commoditized has really opened up new ways of selling software and building companies, ways that can be quite attractive for both entrepreneurs and venture capitalists.

]]>http://www.beyondvc.com/2003/12/om_malik_exseni.html/feed0Building Sales Teamshttp://www.beyondvc.com/2003/12/jeff_nolan_from.html
http://www.beyondvc.com/2003/12/jeff_nolan_from.html#commentsThu, 04 Dec 2003 22:36:07 +0000http://localhost/wp_beyond/?p=387Jeff Nolan from SAP Ventures has some interesting insights on building sales teams. One other I would add is pay commissions when you get paid.]]>http://www.beyondvc.com/2003/12/jeff_nolan_from.html/feed0Capital Efficient Business Modelshttp://www.beyondvc.com/2003/11/yesterday_i_par.html
http://www.beyondvc.com/2003/11/yesterday_i_par.html#commentsWed, 19 Nov 2003 23:09:39 +0000http://localhost/wp_beyond/?p=391Yesterday I participated on a panel at the Mid Atlantic Venture Conference on the current venture capital market and how to raise capital. While this was a plain-vanilla panel about venture investing, there was one theme that was echoed by a number of my fellow panelists from Rho Ventures, New Venture Partners, Edison Ventures, and Cross Atlantic-today's world requires software companies to have a capital-efficient business model. What is a capital-efficient business model and why does it make sense? From my perspective, a capital-efficicent model is one that allows a company to use as little cash as possible to generate significant growth and become self-sustaining and profitable. Growth at all costs without profitability does not get you there and neither does profitability with no growth. Finding the right balance is important. Given this backdrop, the real question is how does today's VC generate a 10x return? Yes, that is easier said than done, but let me walk you through why it is imperative for VC investors today. During the bubble years, a $500mm to $1b exit for a software company was not uncommon. A bad deal for a VC was a $100mm sale. However, many of the software companies during the bubble years required $50mm or more to create meaningful exit value, and in many cases the companies were still not profitable. Today and into the future, I believe we will return to a sense of normalcy where a great exit for a venture investor will mean $100-200mm of value. If it takes $50mm or more to get there you are talking about a 2-4x multiple for a GREAT deal. That is not terribly exciting. A capital efficient software model should only require $20-25mm to get to profitability. With those numbers a VC could earn 4-10x their investment, even at today's reduced values. Given my perspective on what ultimate exit values will be, it will serve the entrepreneur and venture investor well to do as much as they can with as little capital. This is doable-looking at history, Peoplesoft only raised $10mm of venture funding, Documentum raised $13.5, and Veritas raised $6mm. This does not mean skimping on growth, but it requires companies to:

1. Focus on getting product into the hands of its customers earlier rather than later-do not build the perfect product (see an earlier post); 2. Grow carefully-do not ramp personnel too far in advance of revenue; 3. Leverage offshore resources where appropriate; 4. Leverage reseller and OEM relationships (direct sales is way too expensive).

Each bullet point above deserves its own lengthy discussion, and I hope to address some of these in future postings. The impact this will have on the industry will mean that venture capitalists will need less capital for each company resulting in smaller funds and a better ability to generate multiples of invested cash for its investors. For today's entrepreneurs, it will mean that they rethink their go-to-market strategy and remember to balance growth with getting to profitability sooner.

]]>http://www.beyondvc.com/2003/11/yesterday_i_par.html/feed0Strategic Investors-the Good, the Bad, and the Uglyhttp://www.beyondvc.com/2003/11/i_had_the_oppor.html
http://www.beyondvc.com/2003/11/i_had_the_oppor.html#commentsWed, 12 Nov 2003 22:07:58 +0000http://localhost/wp_beyond/?p=394I had the opportunity to speak on a panel today at the Corporate Venture Capital Summit. There was an interesting crew of speakers representing corporate-related venture activities for companies such as Hitachi, Intel, Nokia, Panasonic, Siemens, and Kodak. While one moderator cited numbers showing that the amount of corporate venture investing in terms of dollars is down 50% from 2000, in my mind, that does not seem that different from the change in the general VC market. While there are less corporate investors today, there are also less VCs. From the 3 panels today, it was very clear that the nature of corporate investing, if I can lump all the different players in one bucket, has changed. Like today's VC, they are doing less deals. However, the deals that they are doing need to be more strategic and less opportunistic. This means that someone in a product group needs to somehow get behind the company and act as an internal sponsor. This does not mean that a company looking for funding will get a strategic partnership before a financing.

One of the questions I was asked today was how an early stage company can make a strategic investment successful. Here is what I had to say:

1. Show me the revenue-I would rather have an OEM or reseller deal than a strategic investment. Strategic investments do not mean anything if you are not going to generate revenue for your company and for your partner. In addition, when you sign a reseller or OEM contract it means that the hard work has yet to begin-an early stage company has to throw resources behind a partner to make things happen.

2. Go in with your eyes wide open-what is strategic for you may be tactical for your partner. In addition beware of deal terms that may limit your ability to be flexible. These include rights of first refusal, exclusivity, and other non-standard VC terms.

3. A strategic investment is not an exit strategy-in many cases, it could actually limit your exit opportunities as other competitors to the strategic investor may not want to partner with you.

4. Do your due diligence-how successful has your strategic investor been in setting up relationships for other companies, how much juice does the strategic investor have to make things happen?

5. Manage expectations-constant communication between both sides is key to maintain a healthy relationship.

I could go on and on here but I just wanted to highlight a few of my top of mind thoughts. Suffice it to say that looking at the 30+ companies we have funded, partnering with strategics has been a mixed bag. There have been some that have worked out well and others that have not. However, if done right, I do believe that both sides could substantially benefit from a relationship as long as there are real dollars being generated.

]]>http://www.beyondvc.com/2003/11/i_had_the_oppor.html/feed2Corporate DNAhttp://www.beyondvc.com/2003/11/like_individual.html
http://www.beyondvc.com/2003/11/like_individual.html#commentsTue, 04 Nov 2003 23:59:21 +0000http://localhost/wp_beyond/?p=397Like individuals, every company has its own DNA. Every company possesses a unique team with a unique culture, rhythm, and way of doing business. What many of us forgot during the last few years is that it is awfully hard to change one's DNA. What do I mean by that? Well, a number of companies big and small attempted to recreate their business models by morphing from either a consumer-focused company to an enterprise-focused company or from a hosted software company to a licensed software company. The problem is that one cannot just decide to make a strategic change and expect the whole company to follow suit. For example, selling to consumers and selling to enterprises are 2 completely different models. It requires different sales people, different marketing, and different product management discipline. How can a company that does not have this talent and DNA expect to compete with companies who do? Many companies selling software in the enterprise space have a hard enough time getting customers. Changing from a hosted software model to an enterprise licensing business is not any easier. While you may be selling to the same customer it will require some drastic changes in how you develop, sell, market, install, and ultimately support the product.

I am not saying that this cannot be done but it will require more time and money than you initially think, especially because something called DNA will have to be changed as well. As you know, changing a company's ingrained culture is not easy to do. This lesson equally applies to large companies as it does to small. Yahoo's announcement that it was shutting down most of its enteprise business is a recent example of this. Another example includes Ask Jeeves sale of its enterprise business to Kanisa. It is clear that in both cases that having a small enterprise business live within a consumer-focused company with consumer DNA did not work. So before you make any drastic changes to your business model, know your Corporate DNA and take that into account when you evaluate your execution risk.

]]>http://www.beyondvc.com/2003/11/like_individual.html/feed0The Perfect is the Enemy of the Goodhttp://www.beyondvc.com/2003/10/yesterday_i_was.html
http://www.beyondvc.com/2003/10/yesterday_i_was.html#commentsWed, 22 Oct 2003 06:19:17 +0000http://localhost/wp_beyond/?p=402Yesterday, I was in a meeting with an early stage company reviewing the product development plan with the management team. While the plan was well thought out and defined by process, there was one major problem-it would take too damn long to get a product in GA (generally available to sell!). There were 2 problems-an overemphasis on process and a burning desire to build the 'perfect product' at the expense of getting to market. Let me address each problem in turn.

While having the right development process is absolutely critical, I do have concerns about early stage companies being too focused on process. An early stage company's lifeline is to outinnovate its larger competitors. In any market worth caring about an early stage company will also find other start-up competitors as well. If a company is overfocused on process at the expense of getting to market, I guarantee that it will be climbing uphill against companies that place more emphasis on speed to market. Trust me, I have seen this movie before. At the same time, I am not advocating that you build product with no process either. Balance is key!

What I saw yesterday was also a desire to build the 'perfect product.' This is another crucial mistake that companies can make because you can end up overdeveloping and adding features that nobody needs. Once again, an early stage company must balance between getting the right product out with speed to market. An overemphasis on the 'perfect product' will only land you on a treadmill chasing your competitors' constant barrage of new offerings. Having a 'good product' many times will suffice and give you the ability to have your sales people sell, bring features and functionality ahead of your competition, and get real world feedback to further improve your offering. Like an old, wise entrepreneur once told me, "The perfect is the enemy of the good."]]>http://www.beyondvc.com/2003/10/yesterday_i_was.html/feed1NYC Entrepreneurs and Offshore Resourceshttp://www.beyondvc.com/2003/10/having_met_with.html
http://www.beyondvc.com/2003/10/having_met_with.html#commentsTue, 21 Oct 2003 07:42:32 +0000http://localhost/wp_beyond/?p=403Having met with a number of NYC entrepreneurs recently, I am refreshed to see that many of them are utilizing offshore resources to develop their products. Yes, this is not a new phenomenon, but in a city that lacks hard core developers willing to work for options instead of cash like the Wall Streeters, it is significant. New York has always been known as a strong new media capital and not known for development of real hard core software. New York is also known to have one of the greatest customer bases in the world. Combine access to customers with an ability to manage and use offshore resources effectively and you really get a good opportunity to build some interesting companies in New York.]]>http://www.beyondvc.com/2003/10/having_met_with.html/feed2NYC 2.0http://www.beyondvc.com/2003/10/i_recently_spok.html
http://www.beyondvc.com/2003/10/i_recently_spok.html#commentsTue, 14 Oct 2003 22:05:50 +0000http://localhost/wp_beyond/?p=406I recently spoke with Richard Adams, founder of Referral Networks, which was later sold to Peopleclick. He has started a new venture, RipDigital, which does the dirty work of converting CD collections into MP3 libraries. Basically all you have to do is place an order on the website and the company ships a box to you, you pack your CDs into the box, RipDigital does the conversion, and then ships your new library on either a DVD or portable hard drive along with your CDs. It is truly frictionless commerce. While interesting, this is not the only project that Richard is working on these days.

I have also been staying in touch with Owen Davis who co-founded Sonata (Thinking Media) with Vid Jain. Owen and Vid are back at it again with a new company, Petal Computing. Petal, according to its website, provides software that allows a dedicated group of PCs to operate like an enterprise server or mainframe. Its solutions are further optimized for the high performance needs of the financial world, including modeling, cash management, risk analysis and pricing. In other words, Owen and Vid have created cluster computing software which is highly specific and focused on the financial sector. While the cluster computing space is a competitive market with some established players, I like their approach to building the business. They have actually been working on the software for the last 2 years.

In fact, many NYC 2.0 entrepreneurs (those NYC veterans on their second venture-I hesitate to use the word Silicon Alley since that leaves a bad taste in many people's mouths) are starting companies with a new philosophy to build businesses that uniquely solve a real customer problem. Embedded in the new way of starting companies is strong financial and product discipline. In other words, NYC 2.0 entrepreneurs have learned to keep the burnrate low until they have a great product they can sell repeatedly with feedback from living, breathing beta customers. With this philosophy, these entrepreneurs just may have a better opportunity to create some real businesses that will generate meaningful cash flow.

BTW, I placed my order with RipDigital today for 250 CDs today and will report on the finished product at a later date.

]]>http://www.beyondvc.com/2003/10/i_recently_spok.html/feed0Price isn’t everythinghttp://www.beyondvc.com/2003/10/i_had_breakfast.html
http://www.beyondvc.com/2003/10/i_had_breakfast.html#commentsWed, 08 Oct 2003 22:16:42 +0000http://localhost/wp_beyond/?p=409I had breakfast with a friend the other day, and he was in the process of a bankruptcy filing for his startup. We started talking about why his wireless company had failed and one of the main reasons he cited was that the price was too high. Many of you may ask why is that a problem. Isn't getting a high price a great thing? The term sheet that the company signed was led by a strategic investor and contingent on finding another VC as a co-lead. While he had some strong interest, no other VC or purely financially driven investor was willing to step up at that price. The only other term sheet he had was at a much lower valuation but in his mind a little too onerous. He was willing and ready to take the term sheet, but he had made a promise to his team of 10 that he would make sure they got some backpay as part of the deal. While it was a hard decision, I applaud him for sticking to his deal with his team. Consequently, the company had no other choice but to shut down since it was not at a stage to generate meaningful revenue. So what can other entrepreneurs learn from this?

1. Price isn't everything-sometimes too high of a price can cripple your company. Other investors may not want to fund the company, and you may set unrealistic expectations for you, your employees, and your investors.

2. VCs like sweat equity. Don't hire people that expect to get paid back salary. Isn't the whole point of working at a startup to build real value through equity? If your employees want backpay then you probably have the wrong people for your stage of company. It is a tough proposition for us to fund a $3mm round and have $500k get paid out as salary. This is easy for me to say as a VC, and it may sound self-serving, but it is true.